Starting Your Record Label: Entity Formation
You’re an artist who’s a born entrepreneur at heart! You’ve already recorded a killer album and have approached your friends and family members about investing some monies so you can market and promote it. However, Uncle Big Bucks who’s ready to cut you a check is asking you whether you’ve set up a corporation or an LLC and you’re like…duh!! You quickly reach out to your entertainment lawyer and ask him to help you set up a company for your new record label. He explains to you that there are four types of business entities you should consider if you’re serious about forming a record label and their respective advantages and disadvantages.
- A Sole Proprietorship;
- A Partnership;
- A Corporation
- A Limited Liability Company (“LLC”).
1) If you choose to form your record label as a Sole Proprietorship, then in essence, the business is “you.” You alone own and run the company and it’s pretty easy to form. All you have to do is fill out a “doing business as” (“DBA”) form at your local county courthouse and create a fictitious name for your record label. One big disadvantage: you’re personally at risk if you get sued and you lose the lawsuit because the judgment creditor can recover the judgment award against your personal and business assets! Because it’s not a good feeling to check your bank account and find out that it’s been frozen by a court order, a Sole Proprietorship is not a great choice if you’re considering starting a record label.
2) If you decide to have two or more people as partners in your record label, then you could choose to form a Partnership. A Partnership is defined as an association of two or more people joining to conduct business on a regular basis to make a profit. The partners would all sign a partnership agreement which lists the responsibilities and duties of each partner. One big disadvantage: you will be personally responsible for any business obligations or liabilities any of your partners enter into. For example, if one of your partners signs a contract on behalf of the Partnership to pay a video director to shoot a video but ultimately fails to pay him, you and your partners are each personally responsible for payment! If the video director ends up suing the Partnership because of non-payment and he wins a judgment, he can go after your personal assets and those of the partners but only after he’s first tried to satisfy the judgment against the partnerships assets. If the Partnership has no assets, the personal assets of you and your partners are at risk. A Partnership is also not a great choice to use in starting your record label especially if any of your partners are irresponsible.
3) If you choose to form a Corporation – that’s a much better choice because under the law a Corporation is considered a separate and independent entity separate and apart from you and any other shareholder or employee of the Corporation. So, using our earlier example, if as president of the Corporation, you sign a contract to pay the video director and don’t, then he can only sue the Corporation and not you or your shareholders personally. If he sues the Corporation and wins a judgment, only the assets of the Corporation can be seized – not your personal assets nor the personal assets of your fellow officers and shareholders (i.e., no frozen personal bank accounts!). In addition to limited liability protection, there are significant tax advantages to forming a Corporation which a good accountant will advise you of. Forming a Corporation is pretty easy. You can file the “Articles of Incorporation” with the Secretary of the Department of State in the state you’ll be primarily conducting your business; use various online companies that form Corporations; or get your entertainment lawyer or accountant to incorporate a company for you. Additionally, as shareholders you’ll each sign a Shareholder’s Agreement which states the rights and responsibilities of the shareholders and the rules governing the Corporation. One minor disadvantage is that with a Corporation, there are more administrative requirements. For example, you’re required to maintain corporate records and hold shareholders’ and directors’ meetings on a regular basis. Clearly, a Corporation is a better choice to consider in starting a record label.
4) Finally, you could also choose to form an LLC. This is also a good choice. An LLC contains the elements of both a Partnership and Corporation. Similar to a Corporation, an LLC will provide you and the members with limited liability and protection of personal assets while for ownership and tax purposes allowing the LLC to be treated as a Partnership. You can form an LLC in the same way that you would form a Corporation except that if you decide to form one yourself, you would file a “Certificate of Formation” with the Secretary of the Department State of the state in which you’ll primarily be doing business. In an LLC, you as an owner or other members will sign an “Operating Agreement” which details the duties and rights of each member and the rules governing the LLC. One minor disadvantage: although LLC’s are not required to have formal meetings and maintain corporate records like a Corporation does, some states do require a notice to be placed in local newspapers publishing (or announcing to the world) the formation of the LLC. Such publication notices may add to the expense of forming an LLC.
My recommendation – form either a Corporation or LLC with guidance from your entertainment lawyer and accountant, if you’re serious about getting investors like Uncle Big Bucks to cut you that fat check!