So your best buds and you have formed the next greatest rock band – all ready to write top 10 hits, hit the road on tour, beat off the groupies and get nominated for the Rock n Roll Hall of Fame. Wait a second – what was that sound? Just the IRS auditing your taxes or the band down the street stealing your name and pilfering your songs.
Whoa, slow down. They don’t call it the music business for nothing. Starting a band is just like starting any other business. And if you don’t do it right you could be working for nothing.
FORM A LIMITED LIABILITY COMPANY (OR OTHER BUSINESS ENTITY) AND THEN MAKE SURE TO USE IT!
There are numerous benefits to forming a limited liability company (LLC) for your band that greatly outweigh the costs of having an attorney prepare the filings and the associated operating agreement. The operating agreement for an LLC allows the most crucial issues of the band to be settled and memorialized:
- Which musician(s) are in control of the band?
- Which musician(s) own the business (that is, who owns the band)?
- How are decisions made or voted upon for the band? Decision making and decision makers do not have to be the same as ownership.
- What are the duties and obligations for each band member? How often are practices, how many practices can be missed, who keeps track of the bank accounts, who books the events (gigs), who is allowed to blog about the band, can derogatory remarks be made online about the band, etc.
- Will the band have a website and which musician(s) are responsible for the website?
- Which band members are allowed to take certain actions on behalf of the band, such as negotiating engagements (gigs), booking hotel rooms, make bank transactions, or make purchases for the band?
- How will the band distribute revenue among the members?
- Which band member(s) have to supply capital to the company to meet expenses, such as gas, hotel reservations, equipment purchases, etc?
- How will the losses of the band be distributed for tax purposes? Depending on the tax situation of the various band members, it may more advantageous for the LLC losses to be distributed to a single member or subset of the group.
- What dispute mechanisms will be used if there is an internal conflict within the band that everyone wants to resolve without ejecting any members from the band.
By addressing the above issues in the LLC operating agreement the probability of personal conflicts being developed between band members is greatly reduced. Additionally, the longevity of the band itself (as an ongoing ensemble) is protected against the changing of musicians that play with the band.
More importantly, the LLC forms a liability shield for the musicians’ personal assets. For example, if a venue has outdated wiring and the operation of amplifiers results in a fire, the LLC could shield the individual band members from liability. Similarly, the LLC could protect the band in situations where a person could trip over amplifier cords or a child could hurt themselves with a compact disc. It is hard enough to make a living as a startup band in the music business. The last thing musicians should do is risk losing all of their person possessions.
For all of the above reasons it is critical to form an LLC and take the time to prepare a thorough operating agreement. Equally critical is that all contractual engagements that are undertaken after the forming of the LLC are on behalf of the LLC and not on behalf of individual band members. For example, the appropriate band member should sign a contract for the band to play at a venue using their capacity as a member of the LLC rather than as an individual. Making purchases, hiring booking agents, public relations managers, signing agreements, etc. in an individual capacity may obviate the protections of the LLC and result in the signing individual incurring personal liability.
DON’T POCKET THE CASH – SETTING UP YOUR BAND FINANCES
A lot of the music business involves cash changing hands but don’t think it is free money. If you earn over $600 at a venue then you will receive a 1099, but even if you don’t you are required by the IRS to report all your income. Plus all those expenses paid in cash will be lost if you don’t keep receipts so you can deduct it from the income on your tax return.
The solution is simple – open a business checking account with a debit card. If you plan to tour choose a bank that has branches throughout your touring region. Then use it! Deposit the cash into the bank account and pay your expenses with your debit card. Keep your receipts so the IRS and your bookkeeper are happy.
On that note, hire a bookkeeper and CPA! The best time to hire a bookkeeper is from the start but it is never too late. A bookkeeper will ensure that you are recording all your income and capturing all your expenses. Your CPA will be able to provide you sound tax advice and prepare your taxes.
Some of the expenses your bookkeeper will capture include:
- Start-up costs including legal costs to set-up your LLC, registering your business in your state, trademark and copyright costs, to name a few.
- Marketing expenses including costs associated with creating your logo, website costs, URL costs, flyers, social media costs, and other advertising expenses.
- Fixed asset purchases including musical instruments and other band equipment.
- Unique deductions for Musicians – Supplies including guitar strings, drumsticks, music books, cds, cords, reeds, and other musical items. Music lessons, stage clothing/costumes and makeup, concert tickets, other bands cds, and show expenses used in “research” of musical trends and competition are deductible. But err on the side of caution on this one. The IRS will consider some concerts and cds as personal enjoyment and they are probably right so don’t deduct every concert or cd.
- Musicians have a lot of deductible business travel for tours, auditions, recording sessions, and meetings with business related contacts. Travel is divided into overnight travel and local travel. The IRS defines overnight travel as travel far enough away from home that it is inconvenient to return home at night. Overnight travel expenses including hotels, air fare, bus fare, taxis, parking and tolls, phone calls home, laundry and dry cleaning, and internet expenses while traveling.
- Automobile and Vehicle expenses can be deducted one of two ways – actual expenses or mileage deduction. Actual expenses include gas, repairs, registration and licensing costs, insurance, and depreciation of vehicle cost. Mileage rates change each year (54 cents per mile for 2016) but often yield a higher deduction than actual expenses. So keep track of both so your tax preparer can determine the best deduction. Keeping a mileage log with odometer readings, where you travel from and to and business purpose would be your safest bet for the IRS and there are apps for that!
- Meals are deductible at 50% for overnight business travel and for local business meeting meals. Local meals by yourself are not deductible. Meetings with your agents, promoters, fellow musicians, suppliers would all qualify as business meetings. Be sure to note the business purpose of the meal and who you met with on the receipt with their business card, if they have one.
- Home Office or Studio expenses are also deductible. If you use space in your home “exclusively” for practices, recording sessions, storage of band supplies and equipment, teaching space, record keeping, or other business purpose then you can deduct the expense for that portion of your home including rent or mortgage interest, insurance, condo fees, utilities, real estate taxes, and repairs. This space needs to be a separated area that is not part of a larger area. So part of the family room would not qualify unless there was a partition between the two areas.
- Merchandise expenses including production costs, product design, packaging design, shipping costs, and storage are also deductible.
- General expenses necessary to run your band business including office supplies, telephone, internet, liability and other insurance, and dues and subscriptions should also be captured.
Why bother? By having your bookkeeper keep track of all your income and expenses you will see how profitable your band business really is. You can also track how much each tour costs and the tour profit, your profit from your merchandising, and how you can improve those profits. And let’s not forget, the IRS will want you to file tax returns and let’s not overpay!
Trademark Your Band Name – This is the Difference Between Success and Ruin!
Trademarking your band’s name is a critical step in preventing others from being able to use confusingly similar band names. A trademark registration will provide you with a legal basis to attempt to stop others from forming Facebook pages, LinkedIn accounts, websites, and advertising or performing as a band with a similar name. The ability to make sure that all music associated with your band name is not produced by others ensures that only your quality recordings will be heard by the public and associated with you. This protects your band’s reputation.
COPYRIGHT YOUR MUSIC AND THWART THE PIRATES!
Obtaining federal copyright registrations for your songs is a critical step in protecting your music. Copyright registrations provide a legal basis to attempt to stop illegal download sites from offering your music. Additionally, a federal copyright registration allows your band to collect statutory damages from copiers. What that means is that your band can obtain damages without having to prove that your finances were actually hurt by sales of the pirated music. This is a critical advantage because often it is not possible to prove that you are actually damaged by the sale.
If you have any questions regarding branding, trademarks, patent planning or other intellectual property matters, please contact Garcia-Zamor Intellectual Property Law, LLC. Ruy Garcia-Zamor has been helping individuals and businesses with their intellectual property needs for over nineteen years.
If you have any questions regarding accounting and/or bookkeeping please contact TBooks. Teresa Sanders has been helping individuals and business with their bookkeeping and accounting needs for over twenty years.