"So you want to be a rock 'n roll star, then listen now to what I say..." -Roger McGuinn, The Byrds, 1967
It may seem like an easy thing to do, but starting a band and making it to band practice is just half the story. Here are some important points you need to consider before you decide to hop on that tour bus.
The Band is a Business
The first and most important step in running your band’s business is to accept the fact that it is a business. Producing music is your band’s creative work. Selling that music is a business venture. Like any business, the band members should agree ahead of time how the business will run, how revenues will be distributed, what happens if one or more members leaves the band and, lastly, what type of entity structure is the most appropriate for your situation.
In a sole proprietorship, you own and operate the band by yourself and are personally liable for business debts. You pay the other band members either as employees or as independent contractors. You do not file a separate business tax return. The income and expenses qualify for pass-through treatment.
Pass-through tax treatment means that the taxes of a business are “passed through” to the tax return of the individuals owning the business. Sole proprietorships, partnerships, most LLCs and Subchapter S corps qualify for pass-through status. Pass-through status also means that these business entities are not subject to double taxation as are the C corps.
Perhaps, to the surprise of many band members, the very act of starting or joining a band is a legal decision to form an entity. When two or more people engage as co-owners in a business for profit, state laws regard that entity as a general partnership. A general partnership does not require formal creation. You could be out having drinks with some music friends, say “Let’s form a band,” and if two or more people are in agreement, then you have formed a general partnership.
The obligations of a partnership are not limited to the partnership itself or the contributions of the partners. Instead, partners are jointly and severally liable for all obligations of the partnership, which could potentially have serious consequences. Thus, most businesses form corporations or LLCs to avoid this unlimited liability.
Not all band members are partners/owners, whether through a partnership, LLC or as shareholders of a corporation. In fact, this is commonplace. The band entity may simply contract for, or employ the services of, other musicians.
Both corporations and LLCs come into existence only after the band files the appropriate documents with a state agency. In the case of corporations, the document filed is the articles of incorporation. For the LLC, the document filed is the articles of organization.
The single most important benefit of corporate or LLC structure is limited liability. This means that the entity is responsible for the contractual liabilities (and tort liabilities, such as an accident) rather than the owners of the band (with certain exceptions). This eliminates a guarantee to third parties that each band member/owner will have to pay for all expenses if the band/entity itself is unable to meet its obligations. These entities formally distinguish between the owners of the band and those that manage and work for the band.
As briefly mentioned above, because of the unlimited liability and default rules for partnerships, they are strong enough reasons by themselves that bands should form limited liability business entities in the form of corporations or LLCs as soon as they begin to operate. Another benefit is that you can raise money and have people invest in your company. Further, unlike a general partnership, if a member of an LLC withdraws, the LLC still exists. This structure allows for band members to shift in and out of the company.
Tax treatment is an important consideration for the management of the band, but the strategies for minimizing tax liability may vary depending upon the nature of the income and the ownership. Since owners of an LLC and owners of a closely held corporation electing S corporation status can choose to be treated as a partnership for tax purposes, the nature of taxation need not dictate the choice of organizational form.
The creation of a closely held corporation or LLC provides an individually separate and distinct entity that can own the band’s assets, enter into employment, production and other agreements, thus helping to better distinguish between the band and its members. The formal creation of the band as a corporation or LLC is essential to good band management. As one size does not fit all, you should consult with your tax advisor/CPA about what type of entity structure(s) is the most appropriate for your situation.
About Kory Klein
KORY KLEIN is a CPA and the Founder and President of Klein & Company Management, Inc. located in Woodland Hills (Los Angeles), CA. He has over 30 years of experience providing business management and accounting services. Klein has been a partner/principal in highly respected business management and public accounting firms. The firms’ clients include a diverse range of music, TV, film and other entertainment industry professionals. Klein has particular expertise working with touring artists/bands and musicians.