Should your band be an LLC, a C corporation, an S corp, or another form of business entity? I suggest you read through this high level overview of the various corporate structures and then retain an attorney to help you out.
1. General Partnership
In the absence of a formal agreement, your band is a parnership. This generally means that you split all profits and expenses equally among all members of the band. Accounting for partnerships can get a little tricky with having to account for members’ contributions. This provides you with zero liability shielding. In other words, your personal assets are at risk if you’re operating as a GP. I strongly encourage you to take an extra step to create some limited liability for you and your band members. You never know if someone will slip and fall, sue the band for copyright infringement or have an unforeseen disaster.
2. The LLC
By far the most popular form of business, the LLC provides simplicity and basic protection. LLCs are taxed similar to partnerships in that the profits and losses of the band flow directly to you. The LLC also has corporate liability protection, which means that you can’t be sued individually, the band gets sued instead. This keeps your personal assets off the table in the event of a bad event. Further, your liability is limited to your investment in the LLC.
3. S Corporation
Pretend the “S” means small. S corporations are generally smaller than their big brother, the C corporation. These provide basic tax advantages in that they have flow-through taxation, like the LLC. Stockholders in in S corps reflect their profits and losses on their personal forms 1040 filed with the IRS. These have more formalities than LLCs, with requirements such as annual meetings and mandatory reportings to investors.
Speaking of investors, you’re limited to 100 investors. This may sound like a lot, but don’t forget that Coca Cola has millions and millions of investors with billions of shares of stock between them. If you’re going to get big then you’re going to need to be a corporation instead of an LLC. Few investors are interested in purchasing a “membership interest” in an LLC. They’d prefer stock in a corp. While the S corp status will serve you well in the beginning, successful bands will have to convert at some point or another.
4. C Corporation
When you think of a corporation, this is what you’re thinking of. These are all of your Fortune 500 companies and the preferred entity choice for every band that’s made it big. These have a tax disadvantage. You have to pay taxes on all income at the corporate level and then any distributions in excess of your annual salary are taxed AGAIN as dividends. What are dividends? Dividends are any money given to you in excess of your salary. It’s an accounting term. The least you need to know is that you don’t have this feature with any of the aforementioned corporate forms.
While that sounds bad, don’t ever forget that C corps are designed for the stockholders. If you want major investors in your band then you’ll likely need to form a C corp. The stockholders in a C corp get distributions of dividends in proportion to their holdings. Also, they have the power to vote and elect new managers for the company during the annual meeting. Yes, you give up a lot of control when you create a C corp.
This can get pretty complicated pretty quickly. If you’re a professional then you owe it to yourself to get well versed in the basics of what corporate form you wish to take. There is more than just music in the music industry. It’s unlikely that your band of 4 is going to divide the profits 25% a piece. That’s neither realistic or professional. Issues relating to copyright, trademarks, effort contributed to the band, distributions of likenesses, and a myriad of other issues make it such that you need to sit down with your members and discuss these issues.