Have you ever been to a musical performance and thought to yourself, “What a fun job! I wish I could play rock guitar for a living.” Did you make music with your high school buddies in your garage or your basement? Did you or your friends’ bands eventually fall apart? While some bands come and go, others grow to become professional musicians and legendary icons, selling thousands of dollars in branded merchandise, protecting and licensing their reputable trademark, hiring new band members, signing and negotiating agreements with major labels, publishers and sponsors, and operating as a prosperous business on a tight schedule.
In order to reach this next level of success, such bands and artists must consult with industry professionals, management teams, agents, business executives, and music attorneys who help them navigate through the complexities involved with the corporate side of the music industry.
Is My Band Ready to Incorporate?
Whether you are ready to incorporate depends on your current and projected development as an artist or band. Are you performing regularly, splitting money from gigs, hiring or firing band members, signing royalty split sheets during recording sessions, collaborating with side artists or producers, or intending to sign music publishing and recording agreements? If yes, you may want to consider incorporating for both tax and liability purposes. The appropriate corporate structure can serve to protect you from costly lawsuits brought directly against you or your company, and may allow you to better manage your income streams. In short, the more your artistic venture resembles a small business (generating a profit and forming strategic contractual relationships), the more likely it is you will benefit from incorporation.
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Which Business Entity is Right for my Band?
Sole Proprietorships
Sole Proprietorships have a single, individual owner and incorporation is not required. The owner retains complete control and liability regarding the companies operations. This means the owner has the power to make any and all decisions on behalf of the company, but also personally assumes any and all responsibility for the company’s debts and liabilities (the owner’s personal assets and property are at risk). Finally, sole proprietorships have “pass-through taxation,” meaning the owner must pay and report the company’s taxes on their individual tax return. This is the simplest and least expensive business structure (with respect to upfront costs and filing legal documents).
Partnerships
A partnership exists when two or more people carry on as owners of a business for profit. There are two kinds of partnerships: general and limited. General partnerships require no formalities and are very similar to sole proprietorships as each partner retains personal liability. Limited partnerships are structured so that there is at least one general partner and one or more limited partners who are “limited” with respect to their responsibility, control and liability. By default, each partner is an agent of the partnership meaning the partnership and each of the partners will be personally bound by and liable for the actions of any individual partner, such as signing an agreement. Partners should have their respective attorneys draft and negotiate a partnership agreement that covers issues such as how decisions will be made on behalf of the partnership, what happens if a partner leaves, and whether any property will be deemed partnership property.
Limited Liability Companies
Forming an LLC creates a separate and distinct business entity intended to drastically reduce the risk of personal liability and allowing for pass-through taxation at the owners’ option. To form a Limited Liability Company (LLC), you must file Articles of Organization with your Secretary of State and draft and execute an operating agreement outlining your company’s rules for making financial and functional decisions in detail. Some states require filing fees or yearly payments as well. The process and its formalities can be more easily navigated with proper counseling and guidance from an experienced attorney. A well-drafted operating agreement and knowledge of the associated tax benefits may help a band or artist avoid the drama and pitfalls that come with money, fame and success.
Corporations
Finally, corporations are the last form of legal entity we will discuss. By forming a C-corporation or S-corporation, a band or artist may limit their personal liability by creating an entity that will incur any liability for business related lawsuits and contract with other parties on the band’s behalf. Essentially, the band will provide its services as though it is an employee of the corporation. This way, none of the individuals’ personal assets are at risk. Furthermore, the corporation may issue public or private stock.
To form a corporation, you must choose a corporate name, prepare and file a certificate of incorporation, and take specific corporate actions including adopting bylaws, issuing stock, appointing directors, and holding shareholder meetings.
It’s also important to note that C Corporations are taxed directly (separately from their owners or shareholders), while S Corporations have pass through taxation (described above) and other requirements such as recordkeeping and other state specific regulations. An experienced attorney can help you maintain compliance with the given regulations.
