United States: Band Partnership Papers: Who Needs ‘em?

For most musicians, it’s pretty exciting to put a band together. But what some artists don’t realize is that taking a band strictly from a creative endeavor to a business entity requires attention to details--business details. And those include key practical issues that can affect both the short and long-term success of the band.

Sounds reasonable, but when’s the right time to get down to business? That’s simple: When the dream becomes a reality: For example, when you start operating like a business by hiring rehearsal space, recording demos, playing gigs, investing in equipment and so forth.

A band’s first order of business is to draw up appropriate papers to form a bona fide business entity. Typically, there are four types: Sole proprietorship; Partnership—General or Limited; Corporation ("C" or "S"); and a Limited Liability Company.

For starters, the band should thoroughly discuss all four possibilities with their attorney, business manager and/or accountant, in order to arrive at the most suitable option—the one that will meet the bands needs on both a short term and long-term basis.

The following is how each of them works:

• Sole Proprietorship: A one-person entity that may operate under a person’s name or under a fictitious business name. This choice requires that you file a certificate with the county, city or state in which the business is located. Where there is one dominant band member and the other players are hired hands or sidemen, a sole proprietorship may make sense.

• Partnership: This is similar to a sole proprietorship but has more than one owner. There are two types of partnerships: General or Limited. In a General Partnership, one or more individuals can split the ownership shares of the band. For instance, if there are two partners, they may opt to own the "business" 50/50, or 60/40, or any other combination of percentages. Also there can be several partners and they can decide who owns what percentage of the "business."

Typically, all general partners are liable for the debts of the partnership and each owner’s personal assets can be seized to pay debts. In a Limited Partnership, limited partners or silent partners have limited liability, in other words, they can only lose what they have contributed. Limited partners generally don’t participate in running the business, unlike general partners. Accordingly, person who are actively engaged in running the business (general partners) cannot take advantage of limited liability.

A General Partnership is formed by either an oral or written agreement. If people share expenses and income, or hold themselves out to third parties as an association of persons doing business, a partnership can be considered to have been created. Most bands start as partnerships simply by default.

Every state has rules and regulations regarding the conduct of work, distributing work, sharing risks and rewards, and dissolving the business. Most apply only when the parties have not entered into a written formal agreement to the contrary. Since each state is different, and because band members’ relationships to one another can lead to unforeseen circumstances—a partnership agreement—even in simple form, is highly recommended and what most bands opt for.

• Limited Liability Companies ("LLCs"): This option is a hybrid between a corporation and a partnership. If set up properly, an LLC gives its members limited liability, that is, liability limited to their investments and commitments to invest in the LLC, similar to a corporation. Unlike the latter, it is taxed under federal and state law as a partnership, and is more flexible and less restricted than a corporation. You must file articles of organization and no tax is due at the LLC level as would be the case with a corporation. You must also have an operating agreement in place—how the business will be run, who will do what, what would happen if a member wants to leave, sell his or her interest, or dies—and how decisions will be made.

• Corporations: A "C" corporation is treated for tax purposes as a separate tax payer and must file corporate tax returns and pay corporate tax on its earnings. An "S"corporation is treated like a partnership or LLC in that the tax liability falls on the shareholders. The corporation does not pay tax on its earnings. All earnings are deemed distributed to shareholders, who pick up the tax liability on their personal returns. With a "C" corporation, earnings are taxed twice: at the corporate and shareholder level. Both corporations are formed by filing Articles of Incorporation with the Secretary of State in the state where the incorporation is taking place. With both types you must adopt by-laws governing the conduct of business and keep corporate minutes. Both allow for limited liability of its shareholders if the formalities are observed.

Most bands will want to form an "S" corporation if they elect to operate in a corporate form for tax purposes. However, the band can opt for limited liability in some areas of activity—those most likely to generate liability, and not in others. Examples might include incorporating the touring of the band to avoid personal liability for accidents while on stage, or injury to fans. Without limited liability, band members could be personally liable for what insurance doesn’t cover. However, there is little liability arising out of songwriting or recording (except for copyright infringement). So then in many cases, it might be wise to separate the band’s activities into touring (and form an LLC or corporation for that purpose), and use a general partnership for recording and songwriting.

Explore every option to decide what option best meets your band’s needs. No matter what type of entity you choose to use, you need to clearly spell out what type of obligations you have to one another, what to do if someone leaves the band or dies, who owns the band name if one or more of the players leave, who gets continuing compensation, and what liability you have as a business and as a partner.