Biz: Legal Structure Options For Bands

We’ll be upfront and say that business structure isn’t the most exciting topic that we’ve covered. Yes, this may seem like an unnecessary step at the beginning stage of your project’s life, but as you will see, it is better completed sooner than later even if it means coughing up some money when your budget is tight. There are many unfortunate yet real circumstances that happen to bands every day, and you want to be legally and financially protected when they come your way.

Before you get started, you’ll need to determine whether or not you need to register your business in your state. This depends on the structure you form and the state you form it in, and can usually be determined on your state’s official government website or via a phone call. As an example for Massachusetts, the filing information can be found on the Secretary of the Commonwealth’s website.

There are also a few Internet-based companies, LegalZoom is one of them, that exist to help facilitate the registration process. Make sure to do your research to confirm that the service is reputable. Filing through a service like this can take care of a lot of the headaches associated with the process and they are usually willing to explain the process to you over the phone or through an online chat. We’ve included some info below for you and your bandmates to better understand the different business structures that are available. Enjoy!

Business Structures for Musicians Indie Ambassador TrueDIY

 

1. Sole Proprietorship

Advantages:
This setup is the most basic of all options, as one person (in this case, a musician) makes all the rules and decisions concerning their business and career without having to consult other partners or a board of directors. Financially, sole proprietorships are easy and cheap to create, and are granted borrowing power based not solely on the assets of their business, but of their personal assets as well. The only formal paperwork required are the registration papers that must be filed with the clerk in the city or town in which the proprietorship plans to operate.

Despite this local registration requirement, the sole proprietor has free reign to operate in any state without having to adhere to a particular state’s statutes like a corporation would. If a solo singer songwriter started playing gigs and making money without formally registering himself, he would by default be a sole proprietor. However, a sole proprietorship can still be a band, if one person (most likely the songwriter and vocalist) forms the “company” and hires the other musicians as employees. While this may seem all hunky-dory, there are some severe disadvantages to entering your musical career under this structure, the most dangerous of which is liability.

Disadvantages:
If you are a sole proprietor, you are personally liable for any lawsuits that may come your way. For instance, if you stage dive at your killer acoustic rock concert and break an audience member’s neck in the process, you will be liable for any damages stuck on you by the plaintiff, not your business, because you and your business are one in the same. Less of a red flag but still an issue to think about is the limited physical reach of your business if there’s only one person involved, because as a sole proprietor, you and only you can act on behalf of the business. Thus the business has limited decision-making capability and expertise. When it comes to money, raising capital as a sole proprietor is more difficult as it’s limited to the resources of the owner, not stock and shareholders.

 

2. Partnership

Advantages:
A partnership is very similar to a sole proprietorship with a few differences. It should be noted first that if your band forms and starts making money without any written structural agreement, you will by default have formed a partnership. On the plus side, you have more people on your team. The more partners involved the more expertise, the more connections, the greater the network, and networks are very important in the music industry. And, every partner shares in the profits and or losses of the company together, so everyone is fighting for the same thing.

Disadvantages:
On the negative side, more people also means there’s a greater chance of one partner committing some wrongful act, and just like a sole proprietorship, there’s no limited liability. Let’s take a look at another disaster scenario. Your band, The Foosies, consists of 4 members: Chris the egotistical lead guitarist, Ben the hyper-active drummer, Joe the mysterious accordionist, and Aidan the moody pianist. The Foosies are making some buzz on the local scene and play opening slots for bigger tours when they roll through town, but still are dependent on second jobs for their primary income. That said, each member has drastically different finances.

For the sake of our case, let’s say Joe is scraping by on enough money from his day job as a street performer to make rent and put food on the table every month, but that’s about it. Chris, on the other hand, is wealthy thanks to his alternative career as a model. Let’s say the Foosies are playing a big hometown show before going out on their first national tour. In support of the occasion, all the band’s friends have been buying the band members drinks, and sooner or later Joe the lightweight yet temperamental accordionist gets feisty and starts a fight with the sound guy for improperly mic-ing his accordion. In the process, he punches the sound guy and breaks his nose, who in turn ends up eventually suing for medical damages. Now even though Chris was cool, calm and collected during the entire process, because your band is set up as a partnership and the incident took place within the scope of their intended business (performing music), all partners are fair game for the plaintiff to draw money from. It is very likely that Chris will end up footing the bill for the sound guy’s new nose because he is the only one who can afford it. This is a minor example however, but it illustrates how a small incident can escalate into something much bigger that can also affect the chemistry of the band. Just imagine the cost if someone in the band crashes the bus killing an unrelated motorist in the process. More examples like this one can be found at www.band-law.com.

 

3. Corporation (C Corp)

Advantages:
This entity is by far the most expensive to create, but does carry a few advantages as well, by far the most valuable of which again has to do with liability. When you form a corporation, you are creating a separate entity. You can even think of it as an artificial person. If the scenario above were to happen to a band registered as a corporation, any lawsuit damages would be taken out of the band’s collective money, not personal money. Corporations also have the advantage of the ability to bring in capital from stockholders, but this is more or less irrelevant for bands, at least in modern times. Who knows what the future holds when it comes to individual investors and bands!

Disadvantages:
As we mentioned above, corporations are by far the most expensive and complicated to create. There are fees that must be paid annually, and all licenses must be maintained properly in order to retain the corporate title. Corporations are subject to the governmental regulations of whatever state they file in, and are not in any way nimble. Changing any aspect of an incorporated company in a quick manner to adapt in one way or another is a process full of red tape and thus very time consuming. Also, C Corporations are subject to double taxation, which takes place as follows: Generally, a corporation is subject to tax on its earnings and profits. The shareholders are taxed again when dividends are distributed by the corporation. This process can be avoided by forming an S Corporation which only taxes flow through income, where only the company owners are taxed and not the company itself.

 

4. Limited Liability Company

Advantages:
Assuming your band is actually making money, this is the most sensible structure to form. It combines the best aspects of a corporation and partnership while excluding their most troubling aspects. Similar to S Corporations, LLCs practice flow through taxation. Most importantly, members of the band don’t have to worry about disaster scenarios like the one mentioned above ruining their personal finances, and at the same time are flexible and easily managed like a partnership. It takes two or more principles to form an LLC. When registering an entity like an LLC or corporation, chances are you’ll probably have to form an operating agreement as well, which details all the revenue splits between band members, various publishing rights, and what will happen in the event someone leaves the band for whatever reason.

Disadvantages:
Though they aren’t corporations, they hold the same weight as a corporation. As this is good, they are expensive to form and carry higher annual dues that that of the C or S corporate structures. If the band isn’t making enough money to warrant such an expense, it might be best to hold off until the time is right. However, if the band is investing in equipment, vehicles, merchandise, mailings, travel, etc., it would be advisable to form the business first so that your assets can be protected.

In closing, the formation of any entity outlined above will make it easier for you to write off any and all of your band’s expenses to reduce tax liability. This means everything you purchase to help you do the gig is a write-off and can really make the difference on whether you make a purchase or not.

 

Disclaimer: Indie Ambassador is NOT A LAW FIRM and has no basis to give you legal advice that you can deem safe to use in a court of law. The information and links that you find on this website are for you to choose whether you wish to acknowledge as correct or not. Although I have researched and highlighted various points and links to place on this website, indieambassador.com, nor it’s author in no way purport to have expert knowledge on any subject of copyright law.