Setting Up Your Music Business

Before you can cash a check from a distributor, collect your money from a major tour organizer, or  obtain an occupancy license to move into your new commercial building where your record label offices will be, you have to properly set up your music business. By this I mean file the correct paperwork with the local, state, and federal government. The following 5 steps detail what is necessary to set up your music business from deciding a name to use through filing for your EIN number with the IRS.

Step 1 – Music Business Name

Naming your independent record label is the first step to realizing your dream of being a label CEO. But - be warned - everything is in a name. You don’t want a name that is so long it does not fit onto business cards, flyers, and other music marketing material. You don’t want a name that sounds similar to others or is hard to hear when announced at live events. And you surely do not want a name that already has music industry popularity. You want to find a unique name for your label -- A name that is easily used to create logos, put onto marketing material, and will be easy for folks to understand and recognize.

Keep in mind that you want a name that is available as a web address. While thinking about your label’s new name it is good practice to go to www.godaddy.com and use the domain tool (available on the front page) to do a web search to see if your chosen name is available as a dot com. All browsers today allow folks to enter domain names without using dot com or dot net. If your domain is a dot net, dot info, or dot anything other than com your website will not come up, the website that is dot com will. This is a highly used trick by competition to profit from your marketing mistake.

I can't stress the importance of finding a name people can spell enough. You want your fans, music business associates, and anyone doing a search online or in a phone book, to be able to find you. As we have all learned from first grade: K.I.S.S. (Keep it Short & Simple). You may want to create a name that ensures you come up first in the retail, distributor, online, and phone book listings. This is a marketing practice that has stood the test of time and we see it in all types, styles, and sizes of business. For example: AAA Plumbing. This company will likely come up first in the
phone book under the plumbing section.

Tip: Naming your music business with a name that comes up first alphabetically might help when it comes to retail reorders, distribution pay-outs, and/or online listings. Most accounting software, retail rack lists, etc. use the alphabetical system of tracking.

Step 2 – Get a P.O. Box

Before you file an LLC, get a bank account, or start doing any type of marketing, you will need to have a P.O. Box. Do not use your physical address. You will get people coming to your door looking for a record deal. Or worse… you’ll have a lot of fans showing up hoping to see one of your artists while you are trying to get work done. It’s good to take precautions to protect your anonymity and a P.O. Box can do just that. A P.O. Box is simply a box at an address where you receive mail. Be aware, not all P.O. boxes are equal. If you go to the regular Post Office and get a box you will not be able to receive packages or deliveries from delivery companies other than the US Postal service. While running an independent record label you will need the ability to receive packages and deliveries from all delivery sources; i.e. US Postal service, Federal Express, (Fed Ex), UPS, DHL, etc. Check the neighborhood around your music business location. You might find a small mom and pop company that offers full address P.O. Boxes. This will give you a physical address not a P.O. Box address. If you cannot find a mom and pop, UPS offers P.O. Boxes at their retail stores in most cities around the world.

Expect to pay a higher premium than at the post office for your P.O. Box. In most cases I have been able to get one for about $10 a month or $35 per quarter. Check your local availability - and as always, shop before you buy. You would be surprised at the price range I discovered.

Resources:
http://www.ups.com - United Parcel Service - Nationwide
http://www.mbe.com - Mailbox Etc. – Nationwide
http://pobox.com - POBox – Internet Mail/Package forwarding
*Remember: The United States Mail PO Box does not accept packages. You must find a PO Box that offers package delivery options.

Step 3 – Music Business Structure

Music business structure is just a fancy way of saying, ‘how will the law and IRS look at your music business?’ Will you be a sole proprietor, partnership, C-Corporation, S-Corporation, or LLC? Below is a brief description of each of the business structures. Please remember… this article is not meant to replace a good attorney. You should always discuss music business matters with a qualified attorney and get advice for your specific business needs. For more information on the different types of business structures, I suggest visiting www.nolo.com or www.irs.gov/businesses/small/index.html . Both sites are a great source of information for you and your new music business. Several industry books I have read over the years, in reference to starting and running your record label, have mentioned www.nolo.com. Personally, I have used the site and have found it to be helpful in the daily operations of several of my businesses.

IRS business structure definitions:

Sole Proprietorship
A sole proprietorship exists when a single individual operates a business and owns all assets. A sole proprietor is personally liable for all debts, and business ownership is nontransferable. Under a sole proprietorship, the life of the business is limited to the life of the individual proprietor. The sole proprietorship makes no legal distinction between personal and business debts, and it does not require a separate income tax return. A sole proprietorship is often operated under the name of the owner. Whenever operating a business under a name other than the sole proprietor, an Assumed Name Certificate must be filed with the county clerk.

General Partnership
A general partnership exists when two or more individuals or businesses join to operate a business. Under a general partnership, a separate business entity exists, but creditors can still look to the partners’ personal assets for satisfaction of debts. General partners share equally in assets and liabilities. A general partnership requires an annual partnership income tax return (separate from the partners’ personal returns). A general partnership may be operated under the names of the owners, or a different name. In either case, an Assumed Name Certificate must be filed with the county clerk. As with a sole proprietorship, you will need to file, at minimum, a DBA with your county clerks office. Be sure to check your state and local government for additional requirements in your specific area.

Corporation
A corporation (Subchapter C or S) is created when two or more individuals, partnerships, or other entities join together to form a separate entity for the purpose of operating a business in the state. A corporation has its own legal identity, separate from its owners. The corporation offers protection to the business owners’ personal assets from debts and liabilities relating to the operation of the corporation. Taxation of the corporation varies depending on the type of corporation formed. A corporation must be registered with the Secretary of State.
Note: A Subchapter C Corporation is taxed at a higher rate than an individual. The owners are not taxed personally for profits; however, the owners do pay personal taxes on any salaries and/or dividends, and the corporation is also taxed on the profits. Owners of Subchapter S Corporations may deduct business losses on personal income tax returns, similar to a partnership. The Subchapter S Corporation also offers alternative methods for distributing the business income to the owners.

Limited Liability Company
A limited liability company is an unincorporated business entity which shares some of the aspects of Subchapter S Corporations and limited partnerships, and yet has more flexibility than more traditional business entities. The limited liability company is designed to provide its owners with limited liability and pass-through tax advantages without the restrictions imposed on Subchapter S Corporations and limited partnerships. A limited liability company must be registered with the Secretary of State.
Note: You cannot offer stock in your LLC. LLC’s do not issue stock. You can however accept outside investors. It is a bit tricky, but there are pages and pages of information available on “securities.” Basically, a security is an investment made into a LLC from an outside investor who will not be a managing partner. In other words - a silent investor that does nothing more than gives you money and sits back and waits for his/her share of the profits to be delivered to a mailbox.

Most start-up record labels establish themselves as an LLC. It protects its partners from liability, the process is simpler than a C-Corp., it doesn’t require annual meetings and minutes, and the taxes are passed through to its partners. You can easily file an LLC online with several companies like ww.bizfilings.com  for under $500. If you file as an LLC and find that sometime down the road you need to change your business structure to a C-Corp or S-Corp your attorney can easily handle the details. I suggest, and will assume, you will be setting up your new label as an LLC. All references from this point will be geared toward the LLC business structure. If you and your attorney decide on a C or S Corp there really is no difference in reference to running your label.

Resources:
http://www.nolo.com
http://www.IRS.com
http://www.sba.com
*Remember: Your local Chamber of Commerce is a great resource for all business matters including
local resources to attorneys, organizations, and companies that can help you with making the right
choice for your business structure.

Step 4 – File a DBA

DBA is an abbreviation of “doing business as.” In some cities and states it is also called a “Fictitious Business Name,” “Trade Name,” or “Assumed Name.” All of these mean the same thing. You will have to check your city or state to find how it is called. A DBA is necessary if you are a sole proprietor going by a name other than your own name or a partnership using a music business name other than your partner’s names. An example of this would be: Your actual name is “John Doe” while your record label name might be “Hot Records.” In addition, banks will require a DBA to set up a business account in the name of your business. In most states with an LLC it is not necessary to file a DBA, but it is good practice and good music marketing. As an LLC, filing a DBA in your home city will help if you need to go before the city counsel for a permit to shoot a video at your favorite car wash, or need a permit to hold a charity event supporting the homeless. By filing a DBA with your city or county you are letting them know you are a solid business with the intention of running an ethical music business within the city or county limits. And trust me, as an independent record label you want the city or county on your side. You want them to see you, hear from you, and learn to trust you as a business. Do not be afraid of your city or county counsel. FIGHT THE POWER!!! But fight it quietly, legally, and by showing them that an independent record label can conduct music business as well, if not better, than guys in a three piece suit selling widgets.

It’s pretty simple to file a DBA. Go to your county or city clerk’s office. They will provide you with a form. The form will ask your name, address (You must use your physical address here, not your P.O. Box), what name you want to use (they will do a county/city check to ensure no one else has filed that name already), and what business structure you will be using in your business. The cost is low, usually around $10-$25 depending on the city/state. If on the other hand, you are independently wealthy and want to avoid filing this paperwork, you can use one of the hundreds of online services available to file your DBA. The cost is usually around $80, takes about a week, and you get your certificates in the mail. Just do a search in Google for “file a dba.”

TIP: In filing your DBA, setting up your business structure, or just about anything else you might run across setting up the music business side of your label, I have found that the Small Business Administration (www.sba.gov ), is an invaluable resource. Use this resource. It’s free and they have years and years worth of business information available 24/7 online.

Resource:
http://www.SBA.com

Step 5 – Filing a Music Business License & LLC

In most cities, counties, and states you will need a business license. You will need to check with city hall or your state clerk’s office for filing procedures. I personally filed all of my music business licensing needs online with complete service company that handles all business related filing because it is the easiest way of setting up a business. They will file all forms with your state, city, and the federal government. By doing it this way you are 100% sure you are in compliance with all laws governing your business in your State. The fees range from $350 - $700 for them to do this service for you. These fees include filing your LLC, as well.

Another option is to use your attorney to file your business license and LLC. This is something you will want your attorney to do if you do not use a company that specializes in LLC formations unless you are an MBA student/graduate and really understand the complexities of doing so. The SBA, IRS, and your state website will be a great starting point to learn what is required.

This is an important step. Many independent record labels feel they can do this step at a later date when they have earned money from their label. I highly advise you not do this. You are setting yourself up for many liable situations, starting a business without the proper documentation, and you are basically short cutting your business fundementals. If you have to wait an extra week to start doing the “fun” things with running your label like a&r, marketing, etc. to get your business structure and filings in order, go ahead and wait. You need to start this business off on the right foot.

Resources:
http://www.legalzoom.com
http://www.mycorporation.com
http://www.incorporatefast.com
http://www.llc.com
http://www.smallbiz.com
http://www.incfile.com
*Remember: Your state website is a great resource for filing information, requirements, and organizations that can help.

Step 6 – Obtain a Federal EIN Number

This is from the IRS website:
An Employer Identification Number (EIN) is also known as a Federal Tax Identification Number, and is used to identify a business entity.

You need an EIN if you:
* Started a new business
* Hired or will hire employees, including household employees
* Opened a bank account that requires an EIN for banking purposes
* Changed the legal character or ownership of your organization
* Purchased a going business
* Created a trust
* Created a pension plan as a plan administrator
* Are a foreign person and need an EIN to comply with IRS withholding regulations
* Are a withholding agent for taxes on non-wage income paid to an alien
* Are a state or local agency
* Are a federal government unit or agency
* Formed a corporation
* Formed a partnership
* Administer an estate formed as a result of a person's death
* Represent an estate that operates a business after the owner's death.

Now, what does all this mean? It means you have to file your business with the IRS to fully comply with the federal tax code. This is how you are taxed, identified within the US Government, and how you must conduct your business structure under the laws of the IRS. There is an online form located at:
https://sa2.www4.irs.gov/modiein/individual/index.jsp  This form is the easiest way of filing for an EIN. It is free - lol. I guess the IRS thinks they are getting enough from you already.

Ok, that is all for setting up your music business as a legal entity. I highly suggest you follow these steps and start your music business off the right way. Once you get this accomplished it's time for the fun stuff: Music Marketing, Managing, and Staffing Your Independent Record Label! 

Peace,

Jai
“Love the Music in Yourself, Not Yourself in the Music!”
©2009 Jai Hutcherson. All Rights Reserved.    

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