[This article by Dave Kusek originally appeared on the Sonicbids Blog.]
You’ve put a lot of time and effort into your band. You’ve spent years working your way up, rehearsing, playing gigs, and releasing new music and covers, all while growing your fanbase with your awesome social media, email, and marketing strategies. All your efforts are paying off. There’s no better feeling than getting to the point where you can say that your band is your job, but it also presents a whole new set of problems you need to think about.
When you start making a bit more money as a band and get to the point where this is really your career, you need to start treating it like a job. Your band has become a company, and just like any other company, you need to organize yourself, deal with taxes, and protect yourself.
There are a few options for bands. Right now, you’re most likely operating as a partnership. Without a written agreement, every member automatically gets equal share in the partnership, but you can use a written agreement to set some guidelines for how your partnership operates and how money is split.
There are, however, some problems with partnerships – especially if you’re planning to be around for the long run. In any partnership, your personal assets are at stake should you ever get sued or owe any debts. If your light show goes haywire and someone gets hurt or if you can’t pay your tour bus loans, you can kiss your hard-earned savings, your car, or your house goodbye. Another issue is that if anyone in the band leaves, the partnership dissolves. You’ll have to set up a whole new agreement.
The best and easiest way to avoid these issues is to organize yourselves into an LLC, or limited liability company. Limited liability companies protect your personal assets should you be in financial trouble, members can easily enter and leave the band without disrupting the whole system, expenses can be more easily written off as business expenses, and, unlike corporations, they’re fairly easy and inexpensive to set up and maintain. Often, record labels will require you to set up some sort of LLC, S corporation, or C corporation before signing a deal, as it makes everything easier on their side.
LLCs are also a better option when it comes to taxes. Because of the way they function, corporations are taxed as individual entities, and their members are taxed on top of that as well. Those costs can seriously add up, and often the added costs and complexities of doing business as a corporation aren’t worth it for bands.
So if you’ve gotten to the point where you’re ready to organize yourself like a business, let’s run through the steps for setting up an LLC.
1. File articles of organization
In order to create an LLC, you need to file articles of organization with your state. Don’t worry, filing articles of organization is actually pretty straightforward. You’ll just have to put a few things in writing including your business name, location, the purpose of your business, and how your business is organized. If you want to get a better idea of what a finished articles of organization looks like, here’s a sample.
2. Pay the filing fee
In order to set up an LLC, you’ll have to pay a fee up front. This will vary from state to state, so make sure you check with your state’s LLC filing office. In addition to this upfront fee, some states will have an annual fee or minimal tax requirements. Often, people will create their LLC in a different state in order to get more favorable fees. Although you’re still in the country, this is called a “foreign LLC” because you’re doing business outside your home state. If you want to get a better idea of the fees and requirements for each state, check out this resource.
3. Create an operating agreement
Next, you’ll want to create an operating agreement. Not every state will require an operating agreement, but it’ll help you in the long run. This is basically your chance to figure out exactly how your band will operate. Taking the time to map this out now will save you a lot of band disputes down the line.
In your operating agreement, you’ll want to lay out:
* how you’ll split income and ownership
* how losses will be handled
* how you’ll make decisions
* each member’s voting power
* what your roles, rights, and responsibilities in the band will be
* how the LLC will be managed
* how you’ll deal with new or leaving members to the band
Here’s some more information on what you should include in your operating agreement.
4. Foreign qualification
If you’re going to be selling products and performing outside the state in which you set up your LLC, you’re going to need to register for a certificate of authority in those states. This is basically giving you permission to do business in those states. For the most part, bands are selling their music and performing all over the country, so this is a necessary step.
5. Get advice from a lawyer
You don’t need a lawyer to set up an LLC, but if you’re not comfortable doing everything yourself or you’d just like to have someone double-check your work, hiring a lawyer can be worth your while. Here are a few tips on finding the right entertainment lawyer.
As you can see, there’s a lot to take into consideration when moving towards a career in music, and organizing yourself into a company is just the first step. In the New Artist Model online music business courses, you’ll learn how to turn your music into a successful business – a business where you’re the CEO! You’ll create an actionable and personalized plan that will help you achieve a career in music, and you’ll be able to do it all with the resources you have available right now.
If you’d like to learn more about turning your music into a career, check out this free video lesson series. It will take you through some of the best strategies for indie musicians to help you grow your fanbase and your career.
Dave Kusek is the founder of the New Artist Model, an online music business school for independent musicians, performers, recording artists, producers, managers, and songwriters. He is also the founder of Berklee Online, co-author of The Future of Music, and a member of the team who brought MIDI to the market.
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[Photo of LLC Agreement from Shutterstock.]