Band Business Formation Part II: The Sole Proprietor
I’m a solo singer-songwriter, but I’m going to bring some back-up musicians into the studio for my next recording session. Should I get a written agreement with them?
If, like millions of professional musicians, you are a solo performer, you may not think you need to form a legal entity to carry out your music business.
If you are making money without any kind of formal business entity, you are what the IRS calls a “sole proprietor”. A sole proprietorship has advantages and disadvantages:
The structure is as simple as can be: It’s just you. But if you want to offset any of your music income with your many music-related expenses (new strings and microphone cables, mileage to and from gigs), you will need to keep meticulous, tax-auditable records. As a sole proprietor, you can do this simply using ledger sheets or a spreadsheet program, but it is much clearer and safer if you have a separate bank account. You’ll need to consult a tax preparer about whether you can report losses of your music business on your income tax returns.
You have absolutely control over your work, but you also have 100% of the risk. Granted, risk of liability may seem low (what are the odds of someone being electricuted on your speaker wire at a gig?) but if by chance you are sued for anything (copyright violations, for example), you are personally completely liable, and the person suing can attach your house, bank account, and other personal assets.
It may be difficult to obtain credit as a sole proprietor, depending on your personal credit record and financial situation; you may be able to get a credit card from one of the commercial musician’s supply catalogs, but a bank loan to fund a world tour or PA upgrade may be difficult.
If you are seriously trying to make all or a substantial portion of your living from your music, forming a sole proprietorship Limited Liability Company (LLC) has some distinct advantages. You'll get a separate tax ID number that can help ensure that your music business funds and expenses remain distinct from any other household income. (You’ll use that separate ID number when opening a separate bank account.)
You can get business property insurance for your instruments that isn't subject to the deductible on your homeowner's insurance. And you'll have some liability insulation between the business and the rest of your life and family possessions. If you are a sole proprietor LLC, this liability insulation is not enormous, but it does mean that anyone suing your music business has to first go through the assets of your music business before they can attach your home and other income.
If you are going to bring in additional musicians to record a studio track or perform on a music video, you can and should have a written agreement with them even if you are simply a sole proprietor. That written agreement, signed by everyone involved, should set out who will own the copyrights of the performance, and the terms of payment, including whether the additional performers are getting a flat rate or will be receiving a share of the royalties or other proceeds.
If you do not have a written agreement with other musicians (or actors, such as dancers appearing in a video), signed by those other performers, then those performers will maintain their full copyright interests in their performances, and can make demands for royalties as well as demand that you discontinue distribution of the recording or video if they no longer want it distributed for any reason in the future.
Having an LLC provides a great deal of flexibility in how you collaborate with other performers. The LLC can enter into a contract with the performers. If the performers have their own LLC, your two LLCs can contract with one another. The LLC could hire the other performers as employees; you really should have a bookkeeper/accountant, and this person can set up your employee documents for you.
You can also bring other performers in as members of your LLC, with limited rights (such as not having rights to vote on management decisions) and specified benefits (like being entitled to a specific percentage of proceeds or profits). For a project with large anticipated revenues, it may be a good idea to form a specific LLC for that project.
Even for a solo performer, it’s critical to have a trusted bookkeeper/accountant/tax preparer on your team. You can set up an LLC yourself—it’s not terribly complicated or expensive—but either an attorney or a financial professional can help advise you as to whether it’s the most advantageous option for you, and make sure that you get the most out of it. Investing in some professional advice and forming an entity to structure your creative business products and projects moves you into the realm of a professional in the music industry.
Next time, we’ll look at partnership agreements and LLCs for bands.
