In the music industry, there is a fine line between artistry and a solid business sense. In order to preserve artistry in today’s industry, a sound business infrastructure is not a bad idea. When choosing a business structure, there is quite an array of liabilities to keep in mind. Essentially, a liability is a debt or circumstance in which someone is held responsible for by law. Depending on the way you intend on operating your career, this can affect what you are responsible for legally in the future. The most common business structures in the music business are the sole proprietorship, the partnership and the corporation. Each of these formats possesses obvious strengths as well as weaknesses.
Artists that normally create music and original songs, as well as market themselves most often handle business as a sole proprietorship. The simple fact that a person can run a business independent of anything else, make this a very attractive structure for individual artists. The business form is inherently simple. You are a business, you operate a business and you make all of the decisions of that business. The only large negative to this structure if anything happens to you, you are going to be personally liable for the events. For example, if some unfortunate circumstances occur and you accumulate debts, the courts will hold you responsible to pay them back. If you can’t pay an outstanding balance back with monetary value, you will be required to pay it back with property such as your house, cars or other assets. Weighed against the independence, freedom and simplicity of this method, it is still quite a popular choice.
If you choose to operate as a partnership, in a band for example, the terms of this agreement will dictate the liability present. If someone owns a smaller part of the partnership, in writing, they are only liable for that particular part. Keep in mind there are more complicated partnerships and different methods of entering into a partnership. A wealth of information about this subject is available online and in books.1Generally, these are multiple people agreeing to enter the business world as a team. This business structure is great for bands and can provide for powerful synergies between partners, but again, there are liabilities present. If the partnership can’t stay in business, the partners are liable for the debt incurred. If you can manage to pay it back together then you will be able to continue business however, if not your personal assets are going to be seized by the court in order to pay back debts. This can include your car, home, or any other personal belongings as well.
An interesting alternative to personal liability is choosing a corporate business structure. One can eliminate a great deal of personal liability in the business world by creating a corporation. In the simplest form, a corporation is a fictitious entity operating as a business. If a person decides to set up a corporate structure, only the corporation’s assets can be held liable for any incurring debts. For example, if you want to sign your band to a corporation, and the band cannot pay back the debt on a tour bus, the corporation may be forced into bankruptcy. Legally, your personal assets that were separate from the corporation cannot be seized. However, if you’ve invested money into the corporation, all of your investment must be used to pay back your debts. This method ensures that your house, car and other personal assets are not involved in any way. The only loss you may suffer would be the corporation itself and the original capital investment into the company.
On the contrary, there is a very important trait to a corporation. The amount of upkeep that it takes to maintain corporate status is taxing and can prove to be very time consuming.2There are many government regulations when it comes to corporations. You must file what are called minutes. These are reports from the board of directors that contain an overview of the corporation. Corporate structure was creating to allow for publicly traded stocks. This can become infinitely complicated. A corporation is also double taxed. Any income made on the corporate level is taxed, as well as every payment made for personal income. The personal liability is the smallest, however you must be very educated, disciplined and focused or the government will remove your corporate status.
Most of the time, it is very difficult to foresee circumstances that would render you liable. In the music industry, there are some very common situations that can end up costing your business a lot of money. Knowing these situations would put you one step ahead in preventing them. One of the widest cited examples is that of unexpected copyright infringement. If you find yourself at the opposite side of an infringement accusation, then the business structure you have chosen to operate could affect, change and potentially derail your entire career. In the event that a court would find you guilty of this offense and you don’t have enough liquid assets to pay the damages, the court then must seize your personal belongings to pay the remaining amount. On the other hand, if your corporation were being sued for the copyright offense, then the most you could lose would be the corporation itself in the form of bankruptcy. Unfortunately, situations become much more complex at this level of event, but it is best to always be prepared.
Handling music industry matters from a business perspective is intelligent, and setting up a business structure can help maintain and promote organization. There are many books and articles that have been written weighing the benefits and detriments of each structure, as well as government run websites that help entrepreneurs choose the best structure.1In the end, it comes to market factors, individual careers and personal preference. Everyone operates under different structures, but liabilities are going to be present in all of them. The nature of business is a delicate balance between risk and reward. If you were going to handle your career from a business standpoint, it would be wise to put in some thought into how liable you will be under any given circumstance and what the most efficient structure would be for you to operate.
By C. Adam Sawan
1. United States Internal Revenue Service Business Structure Page. HYPERLINK “http://www.irs.gov/businesses/small/article/0,,id=98359,00.html” http://www.irs.gov/businesses/small/article/0,,id=98359,00.html
2. Corporation Center. http://www.corporationcentre.ca/docen/pmtn/home.asp?t=headoffice