WHAT IS A LIMITED LIABILITY COMPANY?
A Limited Liability Company (“LLC”) is the most simple kind of business entity. Your label may want to consider registering as a formal business entity (or “incorporating”) in the state where you live to use certain tax advantages and to avoid personal liabilities, should your label ever be sued.
WHY SET UP AN LLC?
One of the primary benefits of forming an LLC is that label owners’ personal assets (home, car, etc.) would not be placed at risk in the event that your label or member of label finds itself in some kind of legal trouble. In most cases, if an LLC gets sued and loses, the financial responsibility does not lie on your life outside of the label. Having corporate protection prevents you having having to take individual responsibility—which could potentially affect other people in your life who are not your label mates.
Most states consider a group of people who get together for a shared business purpose a “partnership.” As a partnership, the group can be held individually or collectively responsible for any legal liabilities incurred by the partnership as a whole. If your group is not incorporated, the default rule in most states is that a group of people that gets together for a common business purpose is a partnership. Also, most states have sections of their state legal codes that automatically apply to partners in a partnership. Relying on these default rules can be dangerous and may have unanticipated consequences. Establishing an LLC allows the group to customize their rights and responsibilities as the LLC would have an “Operating Agreement” that can differ from the state law default rules that would otherwise apply to the label as an unincorporated partnership.
Most labels do not consider the value of having a band agreement, covering all artists’ activities and members, present and future. For many groups, this is not a problem until a label member leaves the label, or if the label starts generating significant amounts of money and conflicts arise due to misunderstandings or unclear label policies. Many problems can be avoided by drafting an agreement, or, as described below, creating an Label Operating Agreement that covers all label members’ rights, responsibilities and expectations. LLCs have members; there can also be “managing members” who run the LLC business, or the LLC can be member-managed, with all members can be actively involved in the day-to-day management and operations of the LLC.
Another good reason to establish an LLC is that groups can run all of their music business revenue through the LLC, taking relevant deductions of expenses and, in certain circumstances, availing themselves of tax benefits, such as limiting or avoiding self-employment taxes on income. One LLC can be a publishing company or record company, and can process revenue from all sources including music publishing, sales of sound recordings, public performance revenue from SoundExchange, public performance revenue via ASCAP, BMI or SESAC, merchandise sales, touring and live performance income, endorsement payments, asset licensing income, etc. Consolidating all of these income streams and carefully tracking group income and expenses can help avoid conflicts and misunderstandings. At the end of the LLC’s tax year, each member is furnished with an IRS Form K-1, detailing the overall income or loss that each individual group member would declare on their personal tax filings.
4) Tax assistance
LLC’s, as with all formal business entities, will have what is called an Employer Identification Number (“EIN”) which functions like a social security number for the LLC. Instead of, say, live performance checks payable to one label member, the check would be payable to the label LLC and the LLC’s EIN would be used on W-9 Forms for income reporting to the label LLC. This way labels can avoid the problem of payments being made to one person, whom, in the eyes of the IRS, would be on the hook for reporting all of that income and personally paying any taxes due on that amount.
Before becoming an LLC, you should discuss your intentions with a tax-preparer, accountant and/or qualified attorney to see if an LLC is right for you, and see if there are some tax considerations that would inform your decision-making about setting up an LLC and/or electing a special tax status for the LLC, such as seeking to have your LLC taxed like an IRS Subchapter S Corporation.
HOW TO SET UP AN LLC
LLCs are registered through the Corporation Division in every state. This process can usually be done online and will involve a filing fee. Filing fees, tax laws and other restrictions may apply, so do obtain all necessary information about this process from an authority in whatever state in which you wish to file. Generally, your group must have a physical mailing address in that state: PO Boxes may not be sufficient for this purposes.
The LLC must also designate a “registered agent” for the purpose of receiving notices from the state and/or formal legal notices from third parties. Note: even if your group is registered in your home state, if you perform services or sell products in other states, notably, California, you may be required to register as a “foreign LLC,” and pay taxes, in their states.
OPERATING AGREEMENTS; POINTS TO CONSIDER.
An LLC Operating Agreement is essentially a formal, written “partnership” agreement between all LLC members. The Operating Agreement will list of all LLC Members and their LLC ownership interests and will cover all of the life events in the life of an LLC: The initial organization of the entity; the names and addresses of all members and the ownership shares and responsibilities of each Member; rules for voting on major issues, such as when a new member joins, or a member leaves; and rules regarding the dissolution or wrapping-up of the LLC and its business operations. Other issues and questions to consider include the following:
● What will each label member’s share of the LLC ownership be? One or more label member may have larger shares of ownership than others. This may be reflected in both the ownership voting rights and in the distribution of net income.
● What is the group’s songwriting policy as far as who will own musical composition copyright and publishing rights to songs that the artist writes, records and performs?
● Who will own and control band intellectual property assets, including copyrights (sound recordings, musical compositions, album and merchandise artwork, etc.), trademarks, service marks, logos, etc.? There should be attached to the Operating Agreement a list of all artist’ sound recordings and song compositions: Who owns them, and in what percentages?
● How will LLC assets be distributed if the LLC is dissolved?
● What are the ownership and voting rights? How and when will LLC member meetings occur and how will decisions get made, in terms of label member voting rights? Will the majority rule or must some, or all, decisions be unanimous?
● What if the label buys a van or other gear? Who will effectively “own” equipment purchases?
● Will there be mandatory contributions to a common label fund for future touring or recording expenses?
● Who will be Managing Members, if applicable. Who will be signers on the LLC Bank account?
● What are the expectations and rules, if any, as to label member conduct, professionalism, etc.
● What rights will departing or replacement label members have? Will they have any ownership or control over collective LLC band assets such as sound recordings (and related income), musical compositions (and related income), merchandise, label intellectual property assets such as copyrights, trademarks, artwork, logos and the like?
In sum, LLCs provide many benefits to labels seeking to avoid personal liability, organize their finances, and operate in a more professional manner. A well-crafted LLC Operating Agreement can act as a partnership agreement, clearly outlining each label member’s rights and responsibilities.
FOR MORE INFORMATION OR FOR HELP SETTING UP YOUR LLC PLEASE CALL OR EMIAIL CANDACE COLLINS 214) firstname.lastname@example.org