Closing the Loan-Out Loophole: Why Copyright Termination Rights Should Extend to Artist-Owned Companies

The copyright termination right is one of the most important protections congress created for authors. It providers creators a “second bite of the apple,” a rare opportunity to reclaim ownership of their copyrights 35 years after signing away their rights. But there is a problem: this crucial protection disappears the moment an artist uses a loan-out company or LLC for perfectly legitimate business reasons. This gap undermines the very purpose of termination rights and leaves modern creators vulnerable to losing protections their predecessors enjoyed.

Section 203 of the Copyright Act recognizes a fundamental imbalance: young or inexperienced artists typically license their works when they have little leverage, often for inadequate compensation. The classic example is a musician who signs an exploitative recording contract at age 22. At age 57, even if that contract is still generating revenue, they can terminate the grant and renegotiate from a position of strength — or take their catalog elsewhere.

Congress enacted this provision precisely because it understood that artists routinely lack bargaining power early in their careers and should not be bound forever by deals made under those circumstances. But if you take a magnifying glass to the legislative language, you will find a significant loophole. The statute reads, in part:

“203(a) Conditions for Termination. In the case of any work other than a work made for hire, the exclusive or nonexclusive grant of a transfer or license of copyright or of any right under a copyright, executed by the author on or after January 1, 1978, otherwise than by will, is subject to termination under the following conditions. . . “

The Copyright Act specifies that termination rights apply when an “author” grants rights. But if an author first assigns their copyright to their own LLC, and then that LLC licenses the work to a record label or publisher, courts have held that the author loses termination rights entirely.

Why? Because technically, the grant to the label came from the LLC, not from the author. The LLC is not an “author” under copyright law, so it has no termination rights to exercise.

This creates an absurd result: an artist who licenses their work directly maintains termination rights, but an artist who routes the same transaction through a single-member LLC loses those rights forever — even though the economic reality is identical.

Why Artists Use Corporate Structures

Artists do not incorporate to dodge termination rights. They do it for sound business reasons that have nothing to do with copyright policy:

• Liability Protection: A musician facing potential lawsuits from concert attendees, venues, or collaborators needs the protection of limited liability. Without a corporate structure, their personal assets — home, savings, everything — could be at risk. By assigning their copyrights to the “loan-out company” (a corporation or LLC they control), the company is the contracting party when licensing, assigning, or otherwise dealing with those copyrights. When the company is the one executing deals, the individual artist is better insulated from many legal and financial risks, such as breach of contract claims.
• Simplify Royalty Distribution: When a band or group includes multiple members or songwriters, it is often advisable to assign each member’s copyright interests in jointly written songs to a commonly owned LLC. This allows the group to manage and license the works collectively through a single entity, simplifies royalty collection and accounting, and avoids disputes over ownership or control of the songs in the future.
• Tax Benefits: LLCs and S-corporations offer pass-through taxation and allow artists to reduce self-employment tax burdens. For many working artists, these tax savings make the difference between financial viability and bankruptcy.
• Professional Credibility: Many industry partners expect to contract with a business entity, not an individual. Having an LLC signals professionalism and makes transactions smoother.
• Separation of Business and Personal: Maintaining separate bank accounts and records through a corporate structure is simply good business practice, especially when dealing with royalty streams, multiple income sources, and complex licensing arrangements.

Savvy artists (or entertainment attorneys) with leverage will structure third-party agreements so that rights revert to the artist after a term, preserving the artist’s long-term control. However, it is often the assignments made by artists without such leverage that deserve termination.

Call for a Loan-Out Exception

The current rule creates a perverse incentive structure that contradicts basic copyright policy. Consider two scenarios: Artist A licenses their music directly to a label. They maintain full termination rights. But they also face unlimited personal liability, pay higher taxes, and operate less professionally. Artist B licenses identical music through their wholly-owned LLC. They have liability protection and tax efficiency, but they have permanently surrendered termination rights. Artist B made the financially prudent choice. They did exactly what accountants, lawyers, and business advisors recommend, yet copyright law punishes them for it.

This is not a theoretical problem. Just look at the case of Waite v. UMG Recordings, Inc. (2020). Recording artists John Waite and Joe Ely entered into recording agreements through loan-outs and third-party companies in the late ‘70s. Their attempt to terminate those assignments was rejected, with the court finding that the “grant of a transfer of a copyright” was made by companies, and companies do not have termination rights under U.S. law.

This creates a striking inconsistency in the court’s reasoning. In the very same opinion, the court acknowledges the “broader context” behind Section 203 — namely, congress’s intent to give authors a second opportunity to share in the long-term value of their creative works. The court even emphasizes, when discussing so-called “gap grants,” that it would be inconsistent with congressional purpose to deprive authors of that right merely because of a technicality in timing.¹ By the same logic, the court could have just as easily recognized that merely forming an LLC to conduct one’s creative business should not, by itself, deprive an author of the very termination right congress designed to protect individual creators.

The solution is straightforward: congress should amend Section 203 to clarify that termination rights apply in situations where:

1. The company is wholly owned and controlled by the author(s).
2. The company was formed primarily for legitimate business purposes (liability, taxes, administration).
3. The economic reality is that the author(s) is/are the sole beneficial owner(s) of the copyrights.
4. The company serves as a mere conduit or instrumentality of the author(s).

When these conditions are met, the law should look through the corporate form and treat the arrangement as if the author made the grant directly. This amendment would preserve termination rights while allowing artists to enjoy the legitimate benefits of corporate structures.

[1] Waite v. UMG Recordings, Inc., 477 F. Supp. 3d 265, 273 (S.D.N.Y. 2020)