Which Legal Entity Is The Best Choice For Your Music Business?
When artists formalize their first music company, there can be some uncertainty over which legal entity is the best option to move forward with. Here we compare Inc. to LLC and give you an idea of which choice is preferable.
Guest post by Debbie Egel of the Symphonic Blog
Many individuals ask about which legal entity would be best when they’re first forming their music company. To answer that question, there are a few key differences that can help you decide how to move forward. — In this post, we’ll compare a Limited Liability Corporation (LLC) to a Corporation (Inc.) when it comes to taxation, ownership, and compliance requirements. Here’s the rundown…
Which Legal Entity is Right For Your Music Business?
When you want to form a legally recognizable business, you must register it with the state that you choose to incorporate it in. Once this is done, the business becomes a legal entity and is separate from the individual(s) who founded it. — Off to a good start!
There are many reasons to form an LLC or corporation rather than owning the business personally. — To name a few:
- As long as you are in compliance with state laws, you have limited exposure for liability.
- Having a legal entity increases your credibility with both the music professionals and investors.
However, neither a corporation nor an LLC will protect you in the event of your own malpractice or intentional wrongdoing. For example, if you commit tax fraud or intermingle your personal finances and that of the business, you and your personal assets will be held accountable.
The key difference between an LLC and a Corporation is the way they’re taxed.
An LLC is a “pass-through business entity”. — Profits and losses of the organization go straight through to the owners. Business income equals personal income, so the owner pays the tax on his or her personal return, and it’s taxed at the individual rate. If the business is operating at a deficit that will also be reflected as a deduction from your personal income or wages earned.
There are two kinds of corporations // C Corporations & S Corporations
C corporations are treated as a separate taxable entity, which means the business’ profits and losses are taxed under the corporation, not the owners.
- As a result, corporations are taxed at the corporate rate.
- If the corporation makes a profit, it can distribute this to the shareholders.
- Then, that income is reportable on your personal income tax return.
- It’s a double tax // can cut into the amount of profits realized.
However, certain corporations qualify as an S corporation. An S corporation is a pass-through tax entity similar to an LLC.
- There are several restrictions, such as a limit on the number and type of shareholders and classes of stock.
- LLC’s, are taxed like a sole proprietorship or a partnership.
Sharpen your skills…
Ownership and Management
LLC’s are run by the member/managers and have a great deal of flexibility. They are set up by the founding members through the “Articles of Organization”, and the original members can make choices that suit their intent.
For instance, if one member of the LLC invests more or is running the business day-to-day, the Articles of Organization may allocate a larger share of the profits to that member.
*A note of caution: The consent of the other members of the LLC is required when a member of the LLC wants to exit or transfer their LLC membership interest.
Corporations, on the other hand, are run by officers.
These officers are appointed by and answer to the Board of Directors. Corporations are required by law to hold annual shareholder meetings, keep minutes, and records of actions which also include holding director meetings and keeping minutes of these also.
Corporations distribute profits to their shareholders based on the number of shares they own. These shares are easily transferable to others (unless the shareholders have an agreement restricting transfer)—making corporations a good choice for businesses that seek outside investment or are considering a public stock offering. Whereas in a corporation, it is easier to sell or transfer shares.
Reminder: both LLCs and corporations are required to maintain records such as; the governing documents, shareholder and member lists, and tax returns. Both entities also must maintain an address in the state it is incorporated in and a registered agent.
Make sure to check with both your accountant and attorney to determine which business type is best for your entity. To learn more about the music business, download my Free E-book (link below).
Debbie Egel is an attorney whose practice includes writing and reviewing music contracts, running an independent label for over 10 years; and developing indie artists. She is knowledgeable of the economics of music, the DIY process, and has written an instruction manual for Indie artists, labels and managers called “For The Record” and teaches an on-line course. Debbie has a deep appreciation of the business of music as well as her legal knowledge as a practicing attorney.