Many new entrants into the music business will at some point ask when they should create an LLC for their label.
First, we need to take a look at the liability issues for why you need it.
The financial risks of when to start.
Other opportunities you’ll miss not doing this at the right time.
The problem is this is a creative industry on the surface, and you have to dig a couple of levels to get down to business. This is why you may feel apprehensive about starting, but this is a harmless process. So, let’s get to it!
You Cannot Sign an Artist to Yourself Personally
Creating a bond between two individuals means you become personally liable if you fail to uphold your end of the agreement. Despite its common practice, operating a record label as a sole proprietorship or DBA is risky. Considering that many record labels fail within the first 12 months, personal liability is a significant risk. Think of all the potential lawsuits and the deterrent becomes clear!
Intellectual Property Should Not Be Held in Your Name
Holding intellectual property personally exposes you to lawsuits. It's safer to hold these assets in a business entity until they accrue enough risk to warrant transfer to a holding company. Intellectual property is the cornerstone of your label's value and can be leveraged for funding. It also determines the company's worth when you're ready to sell. Therefore, it's crucial not to hold these assets in your personal name.
Money Should Flow Into a Business, Not Your Hands
All money earned by the record label should be calculated and reported on balance sheets and profit and loss statements. This allows you to keep a cash flow analysis of your business to determine the financial health of the label. It's very hard to do this when all of your money is dropping into a personal bank account without accounting software. To achieve this separation, label owners should use separate bank accounts and credit cards for their business and keep meticulous records of all business transactions.
Start-Up Costs and Organization Cost Write-Offs
For record label operators, monitoring initial setup and organization expenses is essential. These expenses, up to $10,000, can often be deducted, offering potential tax savings. Accurate record-keeping not only aids in financial health assessment but also impresses potential investors and helps in evaluating the return on initial investments.
Quality Human Capital
As your label begins to mature, it's important to have quality human capital, aka labor, on staff or for hire that can execute the jobs needed for the label. The contractors and employees hired will be hired via contract most of the time, and if they are on contract, this labor contract becomes a valuable asset to you if you decide to step down as owner or sell the business.
What Should I Do First?
Start the LLC first. You'll find that the structure for independent record labels is quite simple. You either have members and officers or you don’t, and you have a lot of start-up capital or you don’t.
How Much Does It Cost to Start?
I always recommend labels to have at least $1,000 to build the structure. Then from there, you can develop the type of contracts your label will do business on and then begin to seek out your prospects for signing.
When Should I Create a Parent Company?
Creating a parent company is a strategic decision that label owners might consider in various scenarios, primarily for reasons related to growth, liability protection, financial management, and operational efficiency. The number one reason why is for diversification. If a business expands into different products, services, or markets that are distinct from its original focus, a parent company can help manage these diverse operations more effectively. I always say you should do this when each category makes enough money to be taxed and has enough IP to be valuable on its own. This means it is not when you first start out!
Check This Out!
If you're a music creative or executive looking to build your label or publishing company in 60 days or less, grab the 60-Day Record Label Course and get it done today! You’ll gain the ability to get real funding, avoid contractual pitfalls, and keep the middleman out of your pockets. Click the link below to get started now! If you’re skeptical, grab the free guide, "10 Ways to Increase Your Record Label Profits," which comes with a free split sheet download.
If You Do Start the LLC First
Your business will be poised for growth from the outset.
You'll have better liability protection and intellectual property ownership.
You'll be able to open and operate yo ur business much faster than if you don't start with an LLC.
If You Don’t Start the LLC First
Then, hopefully, this is just a side hustle or DIY project for you.
However, you'll miss out on tracking start-up expenses.
The structure of your label will be disorganized when you begin signing artists.
Ultimately, you'll face significant liability risks across the board.
Conclusion
If you were struggling with the decision to start an LLC for your record label, you now have considerably more information to make an informed decision about launching your music career.
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