Legal Forms of Ownership for your Label

Sole Proprietorship

In order to have a business (any kind of business), you must have a legal entity. Now, this legal entity can be you. By this I mean if your name is Joe Smith, and you want to start up Joe Smith’s record label, no one can stop you (unless there’s already someone named Joe Smith running a label). What you have created, in the eyes of the law, is a sole proprietorship. The issue is that if you go this route, in the eyes of the government (read IRS), any money you make from your record label is going to be viewed in the same way as any money you make any other way (your job, for instance). This is because all of your income from your label will be tied to the same social security number that all your other income is tied to, and that your bank accounts are tied to. This can really complicate things for tax purposes. Additionally, it can make you look sort of unprofessional. When you go to sell your compilation, either online or in stores, you’re going to have to tell people to whom they should make the check out. You really don’t want to have to say, “…uh, just make it out to me.”

d/b/a

There is a way around this unprofessional issue. You can start your label using your existent social security number, while still having a name for your label that’s a little snappier than your own name. The way you do this is by establishing what’s known as a “doing business as” or d/b/a. This means that you can have a legal form of ownership that might be something like: Joe Smith d/b/a Snappy Record Label. By going through the simple procedure of visiting your local town hall, filling out some forms, and then opening a business bank account, you can then have people write checks to Snappy Record Label, as opposed to Joe Smith. You can even have some checks made up with “Snappy Record Label” on them, so that you can pay your bills in a more professional manner.

While the outward appearance is significantly different between Joe Smith and Snappy Record Label, it’s real important to remember that in the eyes of the law there is NO difference; each are sole proprietorships. Snappy Record Label is no different than Joe Smith; same tax ID (social security number), same liabilities (if Snappy Record Label gets sued for whatever reason, its Joe Smith’s money that is risked), etc. For these reasons, most people determine that while a d/b/a may be a good way to start (because of its simplicity and cost-efficiency of formation), it’s not a good long-term solution.

Corporations

The alternative is to create a legal form of ownership that is separate and distinct from yourself. In this way, you have a tax ID that is different from your social security number, and you limit the amount of risk that can be directly connected to you. The way to do this is by forming a corporation. There are a number of different types of corporations, but I’m only going to cover two of them here. As stated at the beginning of this section, while I’m 100% for DIY, this is an area where you really do need to consult a qualified attorney in order to make sure you set everything up in the proper manner. That said there’s a lot you can do on your own prior to bringing an attorney into the picture. In this way, you’ll save yourself a bundle in legal fees.

LLCs

The first type of corporation I want to briefly examine is what is known as an LLC. LLC stands for “limited liability corporation.” An LLC does just that: it limits the amount of liability you have, should you run into problems. For instance, if a band you signed ends up crashing their van into an antique store and destroys a couple hundred thousand dollars worth of furniture, you can bet that the antique store’s owner is going to go after anyone and everyone that she might be able to recover money from. If your legal form of ownership is simply a d/b/a, your personal assets are very much at risk. However, if you’ve established an LLC, you’re liability is limited. In short, the antique store owner can’t go after, say, your house or savings account. The antique store owner can go after assets owned by the LLC (the label’s assets), but there’s a wall between the LLC’s assets and your personal assets. This is a good wall!

In order to establish an LLC, you must create articles of incorporation which detail exactly what it is you do, and you must file these articles with your state. You must then fill out the appropriate IRS forms. There is an initial fee, and then a yearly maintenance fee. If this all sounds a bit much, it’s because it is a bit much. Basically, the government wants to discourage people who aren’t really serious about starting businesses. However, for those who are serious, going through the process of creating articles of incorporation can be a very beneficial thing. As mentioned, it’s helpful to have an attorney work through this process with you.

While an LLC is great for the reasons listed above regarding liability, as well as for tax reasons that are too in depth for this article to go into, it does have one major drawback: an LLC cannot issue stock. This may not seem like a big deal (and there are ways around it, though they’re a bit unwieldy), the ability to issue stock can be very beneficial not only for the obvious money-raising reasons, but also because stock is currency that can be utilized, for example, to attract artists to your label.

S-Corporation

Fortunately, if you want to issue stock, there is a way for you to do it. It requires another layer of complexity as compared to an LLC, but by forming an S-Corporation, you can establish a value for your company, and then issue shares to reflect that value. These shares can then be utilized to attract potential artists, employees, or investors. Of course, you are diluting your own interest in your own company when you give out these shares, but, for some, there is simply no other way to attract the necessary “talent” to the team.

While I stressed the importance of using an attorney should you choose to form an LLC, I’m insisting that you use an attorney should you determine that an S-Corporation is the way you’re headed.

I’m not going to spend more time on this here, because I imagine that the vast majority of you will begin with a d/b/a, and that a smaller percentage will opt for an LLC, thus leaving a teeny number interested in an s-corporation—and those people need to get an attorney.