Band Business Formation Part V: The Band as a Corporation
I’m about to sign with a major record label and leave on a world tour. Shouldn’t I have my own corporation to handle the money?
If you are going full-time with your band, and engaging employees like roadies, bus drivers, managers, agents and public relations professionals, the more complex structure of a business corporation may be the most protective and effective option. A corporate entity might also be appropriate if one of the band members has significant financial risk in their outside activities, or has substantial assets that he or she doesn't want band creditors to be able to access.
While all business entities like a partnership or LLC have a “life of their own” – that is, a legal status of a creature separate from their individual partners or members – the independent, separate status of a corporation is even stronger. A corporation provides the strongest level of protection from personal liability for its founders. For example, let us say a recording artist is sued by a major record label for copyright violations; or, let us assume the recording artist’s airplane crashes, killing several people onboard. If the rights to the song, the recording studio and distribution label, and the airplane are all owned by a corporation, the people suing will have to look to the assets of the corporation to cover the liability. Only in very rare circumstances would they be allowedd to access the personal bank account, home and other assets of the musician themselves.
A corporation can raise money by selling shares (“stock”), but also has to pay its own income tax. Annual reports and separate income tax returns are required, making corporations more expensive to create and manage.
Most attorneys and financial professionals suggest that a corporation – as opposed to an LLC or partnership – is not an appropriate business entity until you are reaching an annual budget in the vicinity of $1 million. Once your band income starts rising, or if you are presented with a potential shift in the direction of your musical career such as the offer of a large contract or touring opportunity, it’s a very good idea to consult your attorney or financial professional about whether a corporate structure is right for you. I would not wait until you have $1 million annual income to have this conversation with your business advisors. Copyrights can escalate in value overnight, and a “breakout” recording or offer can change the fortunes of a performing artist in a heartbeat. Once you have a strong professional footing under you and have developed the fertile ground for a leap in your career, it makes sense to become informed about options for best managing your musical assets.
There are, generally speaking, two categories of corporation:
The “S Corporation” is limited to a maximum of 100 shareholders, and can have many of the same benefits of an LLC (including single, rather than double, taxation), along with stronger protection from risk, but compared to LLCs and partnerships, it has added costs of creation and reporting.
Because the list of shareholders in an S Corporation is limited, its founders can maintain more control over the direction of the company. That said, shareholders are entitled to ensure that the company is being run lawfully, and that it is being run for purposes of generating a profit.
A “C Corporation” is not limited in the number of shareholders. It’s the vehicle of choice for a corporation that is going to “go public” – that is, sell stock on the stock exchanges – but it is subject to “double taxation”. The corporation pays tax on its profits, and then shareholders and employees pay tax on their income as well.
Selling shares to the general public is an ideal way to raise capital to take a business to the next level. For example, money from sale of shares might be used to buy a building, create a record studio, and hire marketing professionals. However, the more shareholders there are, the greater the risk that the founders may lose their hold over the direction of the company, particularly if they do not demonstrate responsible managment and return a profit that gets paid back to shareholders in the form of dividends. C Corporations provide a high level of protection from risk – but at the price of high operating costs and potential loss of control of the company.
The music industry has made radical shifts in the last fifty years. Many of today’s most successful professional musicians do not rely on contracts with major record labels, but have taken control of their own creative assets and their creative integrity through smart business management. Many performing artists sell far fewer download copies than the superstars—but pocket more money than those superstars do, because instead of signing away the value of their music to record labels and management firms, they formed their own businesses to hold, develop, and distribute their assets. Corporations can provide a useful framework for that business, but the cost must be carefully balanced against the benefits.
