“I’m not a businessman, I’m a business, man.” – Jay-Z
Besides the air of legitimacy, having a business entity could make a real difference when it comes down to risks and rewards (and taxes). Whether you’re a solo artist or producer, a band that’s looking for a way to split record, ticket or merch sales, you’re involved in music publishing or distribution, a venue booking acts, a label, or you’re providing support services like sound, backline gear or lighting to set the stage, it might make sense for you to form an entity to do that through. Legally, this means the business will have a life of its own – much like a parent, you’re still somewhat responsible for it, but from the time it’s created until it’s wound down, the organization exists apart from you.
It stands as a barrier between you (now its owner) and whoever it deals with. This limits liability for the owners if anything goes wrong. The entity contracts, collects checks, takes loans, spends money, owns equipment, and provides services. You invest whatever you choose to, between your time and your dime, by deciding (and documenting) how much capital to contribute or how much to spend on reimbursable expenses. Without an entity, though, your own personal assets could be subject to claims instead of limiting risk to the assets the business owns.
Since music can be valuable intellectual property, you can make ownership of the name, brand, and splits clear. You can also think ahead and deal with scenarios like what happens if someone leaves the band. When it comes to taxes, having a separate entity and business banking account can help you tightly track income and expenses and even mitigate self-employment taxes. There are carrying costs to consider, though. Filing fees are typically a couple hundred dollars, but there are also annual reports/renewals that cost hundreds each year.
Copyright infringement/plagiarism, personal injury or premise liability, disputes over licensing and royalties, breach of contract like booking, recording, publishing or management agreements, or tax are all risks and reasons to consider setting something separate up. There is no one-size-fits-all guidance. You may have a long and prosperous career as a musician without ever needing to branch out, but what probably brought you here is some vague sense that an entity may provide tax benefits and personal asset protection. Or you heard somewhere that you have a business whether you form one or not – a sole proprietorship or general partnership by default, without certain protections and benefits. You could choose instead to register a limited partnership, limited liability company or corporation (and maybe elect S-corp tax treatment) to be more considerate about what you have and how it works. There is a risk/benefit calculation for you to do, and this article is intended to help you think through whether, when, and how to set up a separate legal entity for your music business.
Entity Selection and Tax Election
If you make any money doing anything, you either have a sole proprietorship or general partnership. It’s a sole proprietorship if you go it alone or do it yourself, and a general partnership if you do what you do with anyone else. These are automatic/default/fallback forms that take no effort. There is no distinction between the owners and the enterprise. You share all of the risks and rewards, the profits and losses, equally. You can even register a DBA (link to DBA 101) for optics and the ability to use a name besides your own for the operation, but it’s risky business without a separate entity. You have no shield for your assets, so you’re putting it all on the line.
A more thoughtful approach is forming a limited partnership, limited liability company or corporation. With these, only the money you put into the business or expect from the business is at risk from its operations. There are varying carrying costs, and different levels of tax, formality or flexibility between these options, with corporations being the most rigid form. Corporations have double tax – the business pays the corporate rate on income and files its own tax return, then any distributions/dividends to owners are also taxed as personal income for the shareholders. State laws and the company bylaws govern, and they usually require following certain formalities like holding shareholder meetings and taking votes on certain matters, appointing directors and officers, conducting board meetings, and formalizing minutes, consents, and resolutions for corporate actions. For most music businesses, this is overkill.
LLCs are a hybrid between corporations and partnerships. They offer similar protection against personal liability to corporations, but require much less upkeep. An operating agreement between members/owners can generally be as formal or informal as you’d like. You can choose whether the LLC is taxed as a disregarded entity, pass-through partnership, or a corporation. This flexibility makes LLCs the most practical and ideal entity type for most music businesses.
An operating agreement can address all sorts of situations head-on like how decisions are made (majority rules or unanimous vote or veto power), what happens if someone wants out or stops contributing as much (buy-sell), how profits or debts should be shared, who keeps track of money, who gets credit for songs, who decides how music is licensed and used, and a number of other issues that could be really hard to deal with unless you think ahead.
Whether you use a corporation or LLC, you should think about making a Subchapter S election with Form 2553 to be taxed as a pass-through small business corporation or S corp. There are some eligibility requirements like all the owners being individuals and not other businesses, a maximum of 100 shareholders, and all of the profits and losses have to be split based on the percentage ownership of the business. The benefit is that if you put yourself on payroll and get a reasonable salary for what you do, that’s taxed as income, but any other money you get from the business is considered capital gains with a lower tax rate. An entity that’s a corporation would avoid double tax and an entity that’s an LLC would mitigate self-employment tax hits for its owners. Write off whatever business expenses you can, but there is a tipping point where the IRS will consider music to be a hobby instead of a profession, so be mindful of that.
Entity Formation and Registration
The process of forming an entity is fairly straightforward. You file a charter, which has many different names and titles – certificate/articles of organization/formation/incorporation – along with a filing fee. Tada. You’re in business. But there are a few other steps to take once that’s done. You should go ahead and get an employer identification number (EIN). This is a type of taxpayer identification number (TIN) much like a social security number (SSN) but for your business. With an EIN in-hand, you can set up a business banking account. There are a few banks like Mercury and Bluevine that charge no monthly fees.
Besides registration with the secretary of state, you also have to see whether the department of revenue, division of labor, or other agencies require registration. There may also be business licenses required for certain activities. For example, talent/booking agents and talent managers may need employment agency licenses (and renewals) and sometimes bonds in several states. Certain industry guilds, associations, unions, and other memberships could also be required to do what you do.
Just setting up the business isn’t the end all be all. You have to also set up a separate business banking account. If you don’t, you’ll be commingling your funds and run the risk of undercutting your liability protection with vulnerability that someone could pierce the corporate veil and get to your assets. You must also renew the registration. This cannot be overstated – so many music businesses make the mistake of forming only to let annual reports lapse later. That does you no good and basically puts you back to square one, just with a little less money in your pocket.
It’s important to do business in the name of the business and insulate yourself as much as you can. Don’t sign contracts on your own behalf, but use a signature block that indicates you’re signing as an officer of the business. The full legal name of the entity should be there, including any suffix/designation like LLC, Inc, or Co, and you should also list your official title along with your name. The entity doesn’t do much to protect you if it’s not the party to the contract, whether that’s a loan or other deal. Here’s a formula/example signature block:
ENTITY NAME AND SUFFIX
Another requirement is that you abide by the rules you set for the business and the laws in your state. If you’re a corporation and your bylaws say you’ll hold annual shareholder meetings and quarterly board meetings, actually do it. If you’re a LLC and your operating agreement requires members to vote on transactions of a certain size, actually do it. Take votes, notes and meeting minutes, draw up consents and resolutions, and take the business seriously. These documents don’t necessarily have to be fraught with legalese, but they do have to take some shape. You wouldn’t want a liability shield or corporate veil pierced because you didn’t set up a separate bank account, didn’t renew a registration, or didn’t follow formalities.
Headquartered in the Research Triangle region of North Carolina, Fourscore Business Law serves entrepreneurs and businesses in the Triangle, throughout the Southeast and in Silicon Valley / San Francisco. We also represent venture capital funds and other investors who invest in companies throughout the U.S. The idea of delivering maximum impact in a simple and succinct manner is what we’re calling the Fourscore Principle. And that is what Fourscore Business Law is based on. Our clients operate in a broad range of industries including tech, IoT, consumer products, B2B services and more. Questions? Shoot us an email or give us a call at (919) 307-5356. Your first call is on us.