The “music business” is often derided for being too focused on matters of business at the expense of the music. Nonetheless, artists and creatives should remember that professional success requires a certain degree of business acumen and thoughtful strategic planning. One such matter that deserves attention early in an artist’s career is the selection of a legal business structure (or “choice of entity” in legal speak). This entity is sometimes referred to in the industry as a “loanout company” because the entity contracts with third parties to provide the services of the artist. In the United States, a solo artist, group, or band may choose to operate its professional activities as a corporation, limited liability company, or partnership. Each of these entity forms offer benefits and drawbacks that are both common and unique among them.
Generally, each entity structure provides varying degrees of liability and debt protection for the individual owners. This means the personal assets of the owners are not at risk if the business is sued or incurs debts in connection with its professional activities. Businesses are eligible to take advantage of various tax benefits and legal protections that are not available to individuals or informal collectives. A formal entity is also an efficient conduit for business operations and internal management, the ownership and administration of intellectual property and other joint assets, and the implementation of long-term strategic planning. Finally, the adoption of a formal legal structure portrays a basic level of sophistication that is desirable in the business context.
In most cases, the limited liability company form (or “LLC”) is the preferred vehicle for the business operations of artists. Known as a creature of contract, the LLC has fewer legal formalities relative to other entity forms, which means the owners have a high degree of discretion concerning the internal operations of the entity. In contrast, the corporate form tends to be less flexible and the owners must comply with various legal requirements affecting decision-making procedures and revenue distribution. However, the corporate form is in some respects more protective against third party liabilities than the LLC and may be preferable in some unique situations.
A tax advisor might suggest that the business assume “S corporation” status that will allow the owners to mitigate so-called “self-employment” taxes. While an LLC may select “S corporation” tax status, the entity will lose some of the structural flexibility that makes the LLC form so attractive. In comparison, if the company elects to be taxed as a “partnership,” one hundred percent of the revenues attributed to the owners will be subject to self-employment taxes. In some instances, a sophisticated advisor may advise an artist to form multiple entities (e.g., a touring company, a recording company, and/or a publishing company) with varying tax elections to maximize the benefits available to the owners. We should emphasize that these matters are highly fact dependent and require the expert analysis of legal and tax specialists.
After a group chooses the form of its operating entity, the company can open a bank account and start making its fortune. Additional business matters to consider include the protection of the artist’s intellectual property, such as original music and trademarks, and preparation of a partnership agreement among the owners and/or members. For more information relating to the intra-group agreement, see “When the Music Stops: Best Practices for Band Agreements.” The business of music will always be centered around creative pursuits, but savvy business strategies will ensure that the creators are properly rewarded for those pursuits.