This post focuses on registering your music business with Uncle Sam to avoid liability, tax issues, and better business structuring.
I know, I know… registering a business is about as fun as a broken fretboard, but it’s a good idea when you start out. There are a lot of reasons why registering (and registering as the right type of business) is a good idea, but I’m going to focus on liability, structure, and taxes.
First, check your Secretary of State website for information. Many states have free annual publications that describe each kind of business registration (and their processes) in great length. Minnesota has a wealth of stuff here, for instance, including the fantastic ‘A Guide to Starting a Business in Minnesota’.
The Types of Businesses
While it may vary a bit from state to state, generally you have four types of businesses: proprietorship, partnership, corporation, and limited liability company.
I’m not going to go into the gory details with each one, but I will describe the major differences.
Proprietorships and partnerships are essentially businesses run by people. They’re the simplest types of businesses, as your own personal finances and the business’ finances aren’t distinguished. A proprietorship is usually run by a single person, whereas a partnership is run by a couple or more. I would recommend against a partnership for a production company, as having monetary resources pooled together between several people can get ugly quickly. Both proprietorships and partnerships have liability, which means that if, say, someone gets upset with the work you do or if you infringe upon the rights of someone else and have to pay damages, you could potentially have to pay out of your own pocket. Because your own funds and the funds of the company aren’t distinguished, you can be on the hook for quite a bit if something goes wrong (you sample something you shouldn’t have or someone gets electrocuted by your condenser mic power supply).
Corporations have been given a dirty name, but basically they’re businesses that have identities of their own, separate from their owners. Usually corporations are owned by people who have stock in the company, which just means parts of the company, represented by pieces of paper, are split up and distributed among the owners. The cool thing (and unfortunate thing when it’s misused) about corporations is that they can act separate from their owners, meaning that the owners won’t be liable for the damages the company incurs (unless something illegal has been done). Typically there are two kinds of corporations, S and C corporations. The major difference between S and C corporations is that S corporations are meant to be smaller and can only have US owners. C corporations can be any size and can have owners from anywhere. S corporations often get some tax breaks over C corporations.
Limited liability companies (LCC) are not available everywhere. Essentially, they’re like proprietorships or partnerships with the added bonus of having similar limited liability to the corporations. They’re easier to register, cost less to register, and generally make the most sense for a production team (in my opinion).
It’s a good idea to have your business structure clearly defined when taking on a business venture with another person (especially in the creative field).
Once your business is registered you’ll get a tax ID. This is helpful because most freelance forms will ask for either a) a social security number or b) a tax ID number. Having a tax ID means that fewer forms will be floating out in the ether with your SS# on them. That’s a good thing. It gives you a few extra layers of separation between you and your business, which Uncle Sam appreciates for its bookkeeping, as well (it’ll lower your risk of an audit). Plus, it’s much easier to write things off as business expenses (your new laptop, the CD you bought for ‘research’, etc) if you have a registered business. Save your receipts!
Whether starting a record label or just doing some business on your own, take the time to figure out which kind of business makes the most sense for your needs. Registration is worth it.