#1) Set up the Business: Although your selection of a corporate entity will vary depending on your needs, the most popular entity for startup labels is the Limited Liability Company (“LLC”). LLCs are often used for startup or independent labels because they are less complicated to maintain and provide liability protection, coupled with tax advantages less formal than corporations. The LLC is a “pass through” entity, with the tax burden falling on the owners of the company, not the company itself. This set-up avoids “double taxation” which exists with a corporation. Regarding liability, an LLC protects all of the label owners from liabilities associated with the business (meaning that none of the owners are personally responsible for any debts or claims against the business).
Essentially, with an LLC a creditor could come after the label assets but not – for example – your car or home. LLC requirements vary from state to state. To check out options for forming an LLC where you live, go to www.nolo.com and search “LLC” and click on your state. After you’ve filed you LLC paperwork, you’ll want a Federal Identification Number (like a Social Security Number, but for your business). It’s easy to obtain and is required if you want to set up a business bank account or line of credit. Go to www.irs.gov and click on “Apply for an EIN” under “Online Services”. It only takes a few minutes. After you have a Federal ID, you can open a business banking account and start your operation. Remember to make sure all of the money coming in and out goes through your business account – it’ll be important come tax season.
#2) Create an Operating Agreement: Any successful business starts with a “rule book” for the partners to abide by. An operating agreement lays out an understanding of how money is raised, profits are split and partners bought-out. While its advised to have an attorney assist you in drafting an Operating Agreement, here are few major points to decide on prior to hiring your lawyer.
Decision-Making Authority
This is probably the most important provision and essentially determines who has the power to make the important decisions. Decisions such as signing bands, promotion techniques, and authority to enter into contracts are just a few of the major decisions your company will make in its first year. Figure out if every member has an equal vote, and what to do in cases of a tie.
Buy-out/Pay-out Provision
This provision will determine a departing member’s rights and can include rights-of-first-refusal, death of a member, and pay-out provisions. Other important factors include capital contributions by each member, appointment of a manager, division of profits and losses, liability of members, dissolution of company, and tax allocation and liability, among others. You’ll want everything to be laid out before Day 1 of operating your business.
#3) File a Trademark: It’s a good idea to conduct a trademark search of your label’s name at the Trademark Electronic Search System (TESS) before getting started. Go to http://tess2.uspto.gov and search a few different spellings and abbreviations of the company name. Remember, a trademark exists for the protection your label, giving your business the exclusive right to use a certain name, word, or image to identify itself and its products (and prevent others from using or imitating them). It also protects consumers by ensuring that when they buy a product (i.e. a new release from your label) they know they’re getting the real thing. Essentially, trademarks help protect a label by ensuring that their brand isn’t tarnished by imitators touting themselves as the original. Once you’ve selected and cleared a name, register at www.uspto.gov or for assistance at an affordable rate, try www.directlegal.com. If you want the assurance that your trademark is registered properly, hire an attorney specializing in trademarks.
These are simply the building blocks for your businesses foundation. Next month we’ll look at some of the practical legal and business applications that start-ups are using to get ahead.
Adam Barnosky is a practicing attorney and writer specializing in entertainment law and business development. He has worked with musicians, actors, and playwrights in Boston and New York City. Find him on Twitter @adambarnosky.
DISCLAIMER: The information contained in this column is general legal information only. Any use of this column does not create or constitute an attorney-client privilege. Consult your attorney for all specific considerations.
(photo by Mitchell Wojcik)