A legal entity is an organization registered according to the corporate laws of your country or state. Practically and legally speaking, it is an entity apart from yourself, that has a life of its own. However, it will still be controlled by you (or any other people you designate to do so). In the US corporate system, there are many types of structures to choose from (e.g. Limited Liability Companies, Corporations, Non-Profits) and the best way to determine which one is the right fit for your business is to consult an accountant, an attorney, or both.
Do I need a legal entity as an artist or for my band?
Importance of a solid legal structure
You just got back from playing at your brother’s wedding. As you put your equipment down, you stop to count the amount of family events you have been asked to perform at. Aunt Lisa’s 60th birthday party, Uncle John’s high school reunion, cousin Claire’s sweet sixteen, cousin Andrew’s graduation party… and the list just keeps growing. While grabbing your guitar and playing a few chords, it hits you. This is what you were born to do and you want to do it for the rest of your life. Playing gigs will finance your first original recordings.
As grand as this epiphany may sound, before you embark on this journey, you should treat your musical career as your own business in order to prosper and succeed. It is essential for you to have a basic understanding of the complexities associated with operating a legitimate business.
Benefits of creating a legal entity for you or your band
There are multiple benefits behind creating a legal entity for you or your band. There are a few fees associated with it, but this is a minimal investment when you think about all the headaches you’ll be preventing. You should use your discretion in deciding when is the best time to create this entity, but it should definitely be up and running before your first major gig.
Below is a list of ways in which you can take advantage of your legal entity:
Artists risk personal liability when they operate without a legal entity. In order to protect personal assets, musical acts typically create a business entity, such as a corporation or limited liability company (LLC). In most cases, an LLC will make the most sense, as opposed to a partnership or corporation, because it needs less maintenance than full-fledged corporations.
Artists need a team and the support of other people and businesses, such as producers, managers, booking agents, music publishers, record distributors and labels, concert promoters, and venues. Limited liability entities protect the artist from personal liability for any claims arising from any contracts or other obligations entered into by the legal entity.
Need help forming the rest of your team? Check our Artist Development Series:
- Forming Your Own Artist Development Team: Part 1
- Forming Your Own Artist Development Team: The Music Producer
- Forming Your Own Artist Development Team: The Music Publisher
A corporate entity is typically governed by a written contract (an operating agreement for an LLC or a shareholders agreement for a corporation) that outlines how the entity will operate and what will be the formal relationship, the rights and obligations, among the owners or members. This includes the split of any profits and losses among owners. Also, it specifies how any management decisions will be made and how additional owners and members can be added or removed.
These contracts set the rules for the administration, control, and ownership of any artist-owned intellectual property (i.e., sound recordings, audio-visual works) for licensing and distribution purposes. These agreements also anticipate extraordinary events, such as the death, disability, or resignation of members.
The selection of the right type of legal entity may provide tax planning benefits to the business and its members. Another benefit of creating a legal entity for you or your band is that having a separate corporate or LLC entity allows the opening of a corporate bank account under the entity’s name. This facilitates cash management and the tracking of expenses, and allows the deduction of relevant properly documented business expenses.
Most taxpayers can claim business deductions on their personal returns, but by having a company since most artists do not typically make a profit and end up incurring losses for some spans of time, they may be permitted to carry over these documented losses on their tax returns. You should also consult with your accountant or legal advisor to learn of the specific tax incentives available in your jurisdiction.
The use of a company for your business is a sign of professionalism. It implies attention to detail, business knowledge, and dedication.
Importance of Seeking Legal Advice
Legal protection is not something you should try to power through on your own. The law is extremely complex and also very situationally dependent. While an internet article can provide very valuable information, it’ll never be a substitute for the counsel of an attorney.
It is highly recommended that you consult a business or corporate attorney and a CPA. Even though many attorneys understand the overall concepts of this branch of the law, they will generally spend more time researching than an attorney well-versed in the subject. Many entertainment attorneys are also business or corporate attorneys, and will have a library full of business and industry agreement templates, reducing the cost of drafting one from scratch. Additionally, they have a network of connections that might help you establish relationships with other professionals.
Establishing a relationship with a business and entertainment attorney early in your career can be extremely helpful. Some lawyers are fine with payment plans, so even if you or your band can’t pay the total upfront fee, you can try to find a lawyer who will work with you for an agreed reduced rate for a few months.
Follow these tips and you are on the right path to success.
You’ve had your share of mishaps along the way; like the time you got booked to be the opening act for an internationally renowned band and didn’t have to back down when your drummer got into a nasty divorce, and eventually had to replace him.
Luckily, you knew exactly how much you had to give him from your bank account because the operating agreement was clear on the process of removal. You were also able to keep the band’s name, even when he tried to claim he had come up with it. There was also that time you got sued by your former manager claiming a cut of your original recordings and tour revenues, but only those assets belonging to the entity were at risk, and not your personal things (like your house).
Now you are on stage, rocking it with your band. The venue is sold out. In the front row we see Aunt Lisa, Uncle John, cousin Claire, cousin Andrew and all of those family members that watched you perform in all your gatherings, in awe of the amazing artist you have become. Behind them, thousands of people screaming out your band’s name and singing along to your songs. You’ve made it in the music industry.
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