music and entertainment law Mclane and Wong - Entertainment Law

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Business Formation

Any band or solo artist that is performing music to make money is involved in the music business. An artist must behave like a business in order to increase the chances of surviving and succeeding. Hence, the artist must decide what form of business to operate under. Basically, the three choices are: (1) sole proprietorship, (2) partnership, or (3) corporation.

A sole proprietorship is an option only if the artist is a solo artist. There is but one owner of a sole proprietorship. He or she keeps all the profits and is personally responsible for all debts. This option is unavailable for a band.

A partnership is the most popular option for a band. Most bands have a collective goal: to create music (and consequently earn money). In order to accomplish this, each member contributes their time, talent and money. In essence, there is an implied partnership agreement between the band members. When most people go into business together, there is an official written partnership agreement. However, the majority of bands - including many who are best selling acts - have never formalized their relationship. Often this can lead to expensive litigation when a band breaks up or a member leaves because there exists a question as to how profits are to be split, or who actually owns the group name. Without a written agreement to the contrary, the law assumes that each partner is bound by the actions of the other partners, and that everyone is equal. This being the case, bands should be encouraged to enter into a simple partnership agreement early on when everyone is getting along so as to specify exactly what the relationship between the members is to be concerning such matters as: (1) who owns the band name, (2) who owns the songs, and (3) what happens when someone leaves the band.

A corporation is the best alternative for an artist. However, because there are costs involved in beginning a corporation, most artists do not incorporate until they begin making real money. A corporation is a company which is owned by stockholders (i.e., band members). A cooperation is preferred because it provides two advantage that a sole proprietorship and partnership do not: (1) limited liability, and (2) tax benefits. Under the concept of limited liability, if the artist does something and gets sued, the plaintiff is limited to recovering from the corporation only, not from the artist or band members individually. Hence, under a corporate shield the artist cannot have his or her home taken away or wages garnished. An accountant or tax attorney should be contacted concerning the tax advantages. If an artist decides to incorporate, they will usually form what is known as a "loan-out" corporation. Under this concept, the corporation contracts with other parties for the artist's services. For example, if the artist gets a record deal, the corporation would sign the contract and would provide (i.e., loan-out) the services of the band.

It would be helpful for the artist to engage a professional to help select and properly set-up the above business forms.

Copyright 1998, Ben McLane

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