Types of Businesses - Getting Started in the Music Business
What type of business is right for our band?
There are three basic types of business entities: a sole proprietorship, a corporation and a partnership. Each business form has particular benefits and complications. An attorney or accountant can advise you on which organization best meets your current needs and how to make changes in your business as your career matures. Investigate these types of businesses and then seek professional advice when you are ready to begin setting up a business of your own. Here's a brief look at each type:
When one person owns and runs an unincorporated business, he or she owns a proprietorship. If you are a solo performer, the proprietorship is probably the way you will get started. No written documents are required to set up a proprietorship, other than the filing of your business name (if it differs from your legal name.) For information on filing a business name, see Do we need to get a business license? As self-employed persons, proprietors are responsible for all taxable income and debts of their businesses, as well as any problems that may arise.
Your band may wish to form a corporation, which is a separate legal entity that is owned by the band members and any other person who owns shares in the business. The term "Loan-out Corporation" is sometimes used in the music business to refer to a business structure where the band forms a corporation to "loan-out" the band's services to promoters, record labels, publishers and so forth. The corporation signs all contracts for the band and the members all sign a deal to work for the corporation as employees.
The main advantage to incorporating is that you limit your personal liability for business-related matters. Because the corporation is a separate legal entity and signs the contracts, the corporation alone is liable for the band's business problems, and your personal assets are not at risk. You also most likely cannot be sued for something stupid that another band member does, as is the case in a partnership. On the downside, incorporating your business will involve significant start-up costs, including state incorporation fees and attorneys' fees for preparation of the shareholders' agreement. Also, the federal tax procedures for corporations are more complicated than for other types of businesses. You can defray some of these costs by contacting a non-profit agency that helps artists sort out these types of situations, such as Texas Accountants and Lawyers for the Arts (TALA). See the section entitled What if we can't afford attorney's fees? for more information on these organizations.
To incorporate in Texas, you file "articles of incorporation" with the Secretary of State. This is a document that states the basic information about your new corporation; such as name, address, purpose, number of shares and so on. The fee is currently $300. More information on the filing process is available through the Corporations Section of the Office of the Secretary of State. Visit the website at http://www.sos.state.tx.us/corp/forms.shtml to download the forms for free or call the office's SOSDirect hotline at (512) 475-2755.
A legal partnership is formed when two or more people work together as co-owners of a business for profit. "General Partnerships" are the simplest start-up organization for bands because they do not require any written documents or fees in the beginning. Once the band starts working together to make money, Texas law presumes that your group has formed a general partnership whether or not you have put anything down on paper in a written partnership agreement. Without any agreement, some standard legal conditions will apply to your band, including the following:
All partnership members are shared owners of the business, so everyone owns the assets and profits, and everyone is responsible for any losses. Examples of a band's assets include equipment and the band's name. Losses may include any debt you incur from tour expenses, equipment costs, and so on.
Every partnership member has the authority to act on behalf of the partnership, and the other partners will share the responsibility for that act. For instance, if a band member signs a commitment to buy the group a van in the band's name, you may all be responsible to pay for it, even if you never agreed to purchase a van.
Everyone is responsible if something goes wrong and the band gets sued. If a fan gets hurt at one of your shows because your singer flings a bottle into the audience, the injured person can sue the band as a unit or any one member, and each member may be liable for the damages.
By drafting a written partnership agreement, you can structure your partnership around some of these conditions. You can create an agreement that sets out the rights and responsibilities of each partner, but you are all still open to a lot of liability when something goes wrong. What you can do with a partnership agreement is avoid disputes among the members later on down the road.
Call a band meeting to discuss your group's partnership. When you have reached consensus on these issues, consult an attorney to draw up the partnership agreement. Here is a sample agenda:
Who will own the band's songs and name if the group breaks up or somebody quits?
Who is authorized by the partners to spend money or sign contracts on behalf of the group?
How much of the business assets and income does each member own?
Check the suggested reading list for a more detailed discussion of important points to include in a written agreement and customize the group's discussion to fit your situation
Variations on the business organizations:
There are some additional organizational forms that you should discuss with your attorney before setting up a business. Two possibilities are "Limited Liability Companies" (LLCs) and "Limited Liability Partnerships" (LLPs). To register an LLP or LLC in Texas, you must carry insurance for the business and file a form with the Secretary of State. LLCs offer the limited liability of a corporation, but allow you to choose the simpler tax structure of a partnership. The registration fee for this organization is $200 per partner in Texas. The LLC is a new type of business organization, and it is becoming a very popular choice for Texas businesses.
A "Limited Liability Partnership" (LLP) is a variation on the general partnership with all of its tax advantages, but in this form, the partners are not liable for any debts of the group. The registration fee for LLPs is $200 per partner, but the fee is worth the peace of mind of knowing you won't be responsible for any liability that the group may incur. For more information on these business types, visit the Secretary of State website at http://www.sos.state.tx.us/corp/forms_option.shtml to download the information and registration forms for free or call the office's SOSDirect hotline at (512) 475-2755.
If you are working under a band or stage name, you need to file an "Assumed Name Certificate" (commonly called a DBA, for "Doing Business As") at your County Clerk's office. This certificate is like a business license, and it authorizes you to take important initial steps such as opening a bank account so you can issue and cash checks in the band's name. The fees vary from county to county, but are usually under $25.
For more information, see also:
Internal Revenue Service'sStarting a Business at http://www.irs.gov/businesses/small/article/0,,id=99336,00.html
United States Small Business Administration's Startup Guide at http://www.sba.gov/category/navigation-structure/starting-managing-business