TAXI.com

Hello,
First and foremost, i just wanted to put it out there that i'm not taking any of this as formal legal advise.....but just simple research on my end. I wanted to reach out to fellow musicians to see how their music business was set up entity-wise. I've read many articles that suggest that musicians/artists mostly set theirs up as sole proprietorships. I understand it's the cheapest way to be in business but there's a gamble. In a sole proprietorship, one can be fully liable for any lawsuits and my question is, has anyone had any issues with their music that they needed to worry? Other non-musical folks are telling me to incorporate to protect myself, no matter what type of business you're in. Anybody hear of any stories/tips/suggestions that can help me with my research? In a nutshell, i'm looking to start a music company, like many of you, that will create cues for film/tv, publish music, song writing....and any suggestions would be so gratefully appreciated. I can only comb through so many google articles before it dawned on me to reach out to my forum family for enlightenment.

Many Thanks,

Todd Stakem

Hi Todd, I'm Canadian, and I operate as a self-employed person. I do have a couple registered business names as a sole proprietor. I've never felt the need to incorporate. But then I'm not making the big bucks, yet

You'd need an attorney and accountant's advice to be safe.

However, I'm pretty sure incorporating doesn't necessarily protect you from any liability in lawsuits. Maybe if your corporation went bankrupt and you didn't have to claim personal bankruptcy??

A CPA should be able to ask you a few questions and give you the best advice.

Who's going to fund the corporation? shareholders? bank loans? Probably not, it'll probably be you!

It's very unlikely that a bank will loan you any money for a small business without your guarantee, thus making you liable anyway for the debt. If you break the law, the corporation is not going to protect you from going to jail.

Then there's the possibility of double-taxation. Sooner or later a business has to make a profit, if not the IRS will not consider it a business, but a hobby. When the business does make a profit, it will pay business rates, and then if you draw a paycheck from the business, you will be taxed at your individual rate, plus the soc sec and medicare.

Imo, if you are employed by someone, just claim the income on your personal income tax, until or unless your CPA says you have to register as a business or sole proprietor. Self employment tax is expensive,lol!

Todd, I have a lot of experience with corporations, as I have started a handful.

This is not legal advice, but it is friendly advice based on experience. I looked at your profile, but didnt find where you are located. If you are located in the US, all below will make sense. If you are located outside the US, well, sorry, you are on your own.... but still I think most countries have similar principles in their corporate laws.

I will tell you what I did, as I sent off my incorporation papers just this week for my music business. Filing fee was $150. After I get the paperwork back from the South Dakota Secretary of State, I will use that (and the EIN, which will be assigned to me, which is an identification number used when I file my taxes with the IRS) to set up separate bank accounts for the LLC. Think of an EIN number as the corporate equivalent of a Social Security number.

1) I didn't use a lawyer. Ive founded a number corporations and have had a lot of experience with ups and downs of having a corp. My businesses have been audited by the IRS, and my businesses have been sued multiple times (and I have sued other businesses multiple times as well)..its not personal, its business, and its a jungle out there.. lol. In my experience having a corporation is a very valuable shield to limit personal liability.

For example, if you do an LLC you will need an Articles of Incorporation in order to set up a bank account, etc. You can get boilerplate ones on the internet on legal sites for free or small fee. I used the same one used for the last LLC i set up, I just changed the name of the LLC at the top and the signatories at the bottom.. its all boilerplate stuff, for the most part.

2) which type company? in most states, there are a number of different entities (these entities are recognized by IRS, as when you file there boxes that you check for C corp, S corp, LLC and also LLP)
C corp, or common corp
S corp
LLC (Limited Liability Corp)
LLP (Limited Liability Partnership, usually used by service firms like law firms and accountant firms)

I have had versions of each of the top 3.

C corp is like most corps on the stock exchange. With a C corp yes there is double taxation, to an extent. Whereas the c corp pays taxes on profits, salaries are a deductable expense to the corp, so they are not double taxed per se. What is double taxed is DISTRIBUTIONS to the shareholders. The distributions (dividends if you will )are not tax deductable by the C corp, and come out of after tax revenues, so they already have been taxed for income, and dividends are taxable to the shareholder, hence the double tax. Also, losses stay in the corp, and cannot be offset against other income by the shareholders.

The other 3 types are radically different, in that there is no double taxation, all profit and loss flows directly to the shareholder(s). So as a shareholder you will get a k1 form form the LLC or Corp (which if it is your Corp or LLC, you or your accountant will make out the K1 on behalf of the LLC), detailing your share of the profits or losses that you have to report on your 941 tax return. The LLC/S corp/LLP files a tax return, but is not liable for any income taxes because all of that flows out of the entity directly to the shareholders. I used losses from my s corp and llc corps to offset other income on my 941. IRS never auditted me for that, only for other expenses (I was traveling to japan extensively as a biz expense and they thought it was too big vs my total corp revenue so they looked into it, but when I showed recpts and that they were reasonable biz expenses, they had to accept them.)

3) Having a separate entity that does business on your behalf is a HUGE deterrent against personal liability. (NOTE: this is regarding civil lawsuits. Having a corp will not protect you from criminal activities, but your friends Im sure are talking about getting sued by other entities, ie civil lawsuit. For example, copyright infringment is typically a CIVIL case, not a CRIMINAL case) If you run your LLC or corp with an arms length standard of business (this means you have separate bank accounts, you dont intermingle personal and biz funds, you file all your annual reports and other required paperwork with your state Secretary of State, etc), you have huge advantage. Yes, if someone wants to sue you for infringement, they can put both you personally and your corp as defendants on the lawsuit, but dont let that scare you. Its a tactic, and putting it on the original lawsuit and actually making it stick in court are two radically different things. Of course it will cost you big legal bucks to defend it regardless, but it is 100000000% worth having a corp entity to act as a shield for liability. The legal term for making a shareholder or individual liable for things that a corporation did is called "Piercing The Corporate Veil".. that means they will have to prove that in practice you were the same as the corp, the two entities are intermingled. If you do as described above, your corp is pretty much safe. Ask any corporate lawyer, and they will tell you that in general Piercing The Corporate Veil is VERY VERY hard to do, as the legal bar is very high. Our corporate laws in the US are very good, they work as designed. One very topical example is our de facto Republican presidential nominee and his Atlantic City casino activities. All 3 of his CORPORATIONS went bankrupt, but (as he as stated numerous times), he PERSONALLY made out like a bandit. ("I took a lot of money out of Atlantic City" is one of his quotes.). This is not intended as a commentary either way positive or negative on Mr Trump, just an illustration. No one was successful in Piercing the Corporate Veil on his casino corporations, even tho they had his name all over them. Corporations are INVALUABLE business tools. They work the same whether it is a Fortune 10 company traded on the DJ or they have one owner and one employee (who is the same person). It doesn't matter in the eyes of the law.

I suggest an LLC. The S corp usually requires an annual meeting and an Annual Report to be sent into the state office. The LLC (at least in South Dakota) once set up does not require annual meetings nor does it require annual reports (which also come with a filing fee each year)

There you go. Here are my opinions. Hope it is useful to you..
Tim

The legal term for making a shareholder or individual liable for things that a corporation did is called "Piercing The Corporate Veil".. that means they will have to prove that in practice you were the same as the corp, the two entities are intermingled. If you do as described above, your corp is pretty much safe. Ask any corporate lawyer, and they will tell you that in general Piercing The Corporate Veil is VERY VERY hard to do, as the legal bar is very high. Our corporate laws in the US are very good, they work as designed.

If there is only one shareholder, and one officer in the corporation, and they are the same person, it seems pretty easy imo!

Beware of "discovery", I didn't discover it until court,lol! "Have to prove", is irrelevant with discovery. Essentially, they send you a list of questions to answer. Questions like, "Are you the same as the corporation?". If you lie or don't answer, you lose by default.

Discovery, in the law of the United States and other countries, is a pre-trial procedure in a lawsuit in which each party, through the law of civil procedure, can obtain evidence from the other party or parties by means of discovery devices such as a request for answers to interrogatories, request for production of documents, request for admissions and depositions. Discovery can be obtained from non-parties using subpoenas. When a discovery request is objected to, the requesting party may seek the assistance of the court by filing a motion to compel discovery.

https://en.wikipedia.org/wiki/Discovery_(law)

Lady Justice wears a blindfold so she don't see evil, she's blind to justice. The educated wear their full body armor in her presence, because when she starts thrashing that sword about blindfolded, those without armor will sustain casualties!

Len, I have to respectfully disagree with you.. and I speak from experience.. Piercing the Corporate Veil difficulty is not any easier for your opponent even if there is only one shareholder, if you have maintained the veil properly.

When it comes to discovery, etc, obviously one can shoot themselves in the foot without legal counsel. Whereas I personally don't need or recommend the need for legal counsel to SET UP a corp (unless you want the comfort factor), absolutely the very first thing ( even before breathing, metaphorically speaking) I always did when faced with any legal attack (usually a certified letter is the most frequent way you will be notified, but Ive also been served by the Sheriff, which costs your opponent more, but it is often used as a tactic as it comes with some emotional shock and awe, as most people have never had the Deputy Sheriff pull up into their drive way and serve them papers... but Ive been served a number of times for business matters and the shock and awe really stopped being effective to me) was to contact my attorney. I would NEVER NEVER EVER recommend responding to any request for discovery without counsel. In fact before it even got that far, or even close to where discovery was going on, my attorney would have been all over it. So, yes, absolutely attorney advice is indispensable when faced with a legal attack.. however, I personally don't need an attorney to set up a corp.. but YMMV.

All the best to you, Len.

Best regards.

TimWalter wrote:Len, I have to respectfully disagree with you.. and I speak from experience.. Piercing the Corporate Veil difficulty is not any easier for your opponent even if there is only one shareholder, if you have maintained the veil properly.

When it comes to discovery, etc, obviously one can shoot themselves in the foot without legal counsel. Whereas I personally don't need or recommend the need for legal counsel to SET UP a corp (unless you want the comfort factor), absolutely the very first thing ( even before breathing, metaphorically speaking) I always did when faced with any legal attack (usually a certified letter is the most frequent way you will be notified, but Ive also been served by the Sheriff, which costs your opponent more, but it is often used as a tactic as it comes with some emotional shock and awe, as most people have never had the Deputy Sheriff pull up into their drive way and serve them papers... but Ive been served a number of times for business matters and the shock and awe really stopped being effective to me) was to contact my attorney. I would NEVER NEVER EVER recommend responding to any request for discovery without counsel. In fact before it even got that far, or even close to where discovery was going on, my attorney would have been all over it. So, yes, absolutely attorney advice is indispensable when faced with a legal attack.. however, I personally don't need an attorney to set up a corp.. but YMMV.

All the best to you, Len.

Best regards.

Tim, I don't disagree with you! I didn't respond to the discovery, I couldn't afford an attorney, so I lost.

I shouldn't have said, easier, I meant obvious, and it was my opinion, in no way shape or form a legal opinion,lol, as for a common man it is transparent, for a legal eagle it is veiled!

What kind of law needs a veil??

I have opinions and questions about law, who writes it, who benefits, who is above the law and who it applies to and when it's enforced, just nothing worth sharing,lol!!

Hi Todd

I'm an attorney (solicitor) in the UK with some experience of both CA and NY law, practising corporate and commercial law.

Unless you're in the kind of business where being sued is a risk, you generally don't need to incorporate. As a writer, you are more likely to be doing the suing to protect your copyright than you are to be sued (unless you're Led Zeppelin, maybe).

For most people starting out, the question is one of taxation. Certainly in the UK, trading through a company gives a preferable tax position for certain types of work. This is something on which you need to take tax advice from a qualified accountant. But unless you're earning significant cash from your writing, it's not something I would waste the money on right now.

Once you are making significant cash, then make sure you get proper advice. By that, I mean individual advice tailored to you from a professional you can speak to directly. None of the well-meaning forum-dwellers, myself included, have enough information to advise you properly on your individual personal tax situation.

Best wishes
Matt

Thanks for all the replies folks!! I'm super appreciative. I'm based out of Boston and looking to start a music company. The LLC sounds like it's the best option when choosing to do it right the first time. Can I start off as a sole proprietor for the first couple of years then change to LLC? Any idea on what entity would be ideal for ensuring that my music business/catalog/royalties get passed down to my kids? Thanks again for all of your feedback!!

Hi Todd

You really need personalised advice from an accountant if you want to get into estate planning. If the aim is to do it right from the beginning then you'll need to pay someone qualified in Massachusetts for some tailored advice.

Cheers
Matt