Band Business Formation Part III: Write Your Own Partnership Agreement
My last band had a nasty breakup when the drummer quit and took the PA we’d bought with a year’s worth of gig fees. I don’t want to put my heart and soul, time and money into a new band unless I know we’re in agreement over who owns what. What’s the easiest way to do this?
The simplest way to make sure all band members are on the same page on issues like how pay is divided, who is responsible for expenses, and who owns what equipment, is to put it down in writing.
Whenever two or more musicians are gigging for money on a regular basis, a formal legal entity for the band is a good idea for a bunch of reasons. A partnership agreement (or an LLC -- limited liability company – that we will talk about in the next article) allows the band to have its own bank account. A separate band bank account makes it easier to keep track of all the band’s income, deduct band expenses (like gas, hotel bills, and payments to sound engineers), and then divide up the remaining profit (if any) equitably between band members by whatever percentages have been agreed. Each band member only has to pay taxes, if any, on the money paid out to him or her.
There are a number of disadvantages to forming a business partnership as opposed to other business entities like an LLC. One of these disadvantage is that partners are each individually liable for all the debts of the partnership—even those incurred by other band partners. So if your band partnership gets a Musician’s Friend credit card, and one of your members buys $100,000 worth of light-show equipment (not that there’s anything wrong with that), all band partners are personally responsible for that debt.
If the band gets sued, all partners are personally liable for any judgement that results as well. Most musicians aren’t concerned about liability until the day that a bunch of drunks at a club, or toddlers at a farmers market, decide to climb your speaker stands and topple them into a barbecue grill. Once something like that happens, assuming everyone escapes unscathed, you may want to talk about business insurance, or moving on to a more complex form of business entity that provides some protection from liability risk.
Another disadvantage of a partnership rather than an LLC is that – unless you’ve carefully drafted a clear ‘exit strategy’ in your partnership agreement – once one member withdraws (quits the band), the partnership dissolves: You must close the bank account, cancel the credit cards, and discontinue using the band name. Obviously it’s extremely important for that ‘exit strategy’ to be spelled out very clearly to avoid these issues.
Partnerships are simpler to create than other types of business entities, however, and there is considerable freedom to draw up the terms of the partnership agreement any way you and your bandmates want it to read. There does not need to be a lot of legalese, and other than obtaining an EIN (an IRS taxpayer identification number that works as the ‘social security number’ for the parntership), there’s no need to register anything with the government. That makes a partnership agreement the fastest and easiest way to formalize a band’s business structure.
To form a band partnership, step by step:
Decide on a name. Isn’t this often the hardest part?
Register the name as a “DBA” (doing-business-as) or trade name with the appropriate office in your state. There will be a modest fee for registering the trade name. Be sure to note a reminder in your calendar to renew the trade name registration every year, or as required by your state.
Write your partnership agreement. A template for a band partnership agreement is provided as a Resource with this article. The most important thing is to talk through each element with your band partners and decide, collectively, how your band will work.
Once you complete your partnership agreement, get an EIN from the IRS online for your new partnership. There’s a one-time fee for having the IRS assign an EIN.
Take that EIN and copy of your partnership agreement to the bank and open a bank account for the band. Be sure that any checks paid to the band are made out to the band name and deposited in the partnership account. If you complete a W-9 for a venue, use the band EIN.
Decide how you’ll keep careful track of expenses, receipts etc. You can use an envelope or box kept in the band van; each member can keep their receipts in their instrument case and then enter them on the books at a monthly business meeting before a practice session; or you can use something like QuickBooks online and give each partner access to enter their expenses as they happen.
Find a bookkeeper/tax preparer who can prepare the partnership tax return at the end of the year. Each band member gets a copy of the the K-1 partnership tax return form and will report their portion of the profits on their own income tax returns.
