Does your music business need an LLC?
Ready to start a business in music, but aren’t sure where to start?
You are not alone. Many of my business management clients were confused about the details of running a business. They were overwhelmed with tasks and it messed with their ability to be creative.
Once they got everything set up properly, they were much more comfortable making music and sending it out into the world. When they knew how to run their business, their creative process became seamless. After all, it’s difficult to imagine a profitable, successful future, when you’re afraid of the process that gets you there.
The first step to earning a living as a professional in the music business is to set up your own company. Having a legitimate, legally recognized company and knowing how to run it means you can do your banking without stress, apply for grants and loans with confidence, and control your budget and spending. Knowing the proper way to manage publishing and copyright means you will be able to collaborate with those incredible musicians you know. You will be free to create.
The following information applies to most music-based businesses, including musicians, producers, songwriters, managers, agents, publishers, merchandising companies, artists, photographers, web designers, etc.
To help you complete the Business Protections Worksheet in the Start-up Essentials Workbook, I have compiled a list of definitions and questions for you to ask yourself, your lawyer, or your CPA as you establish your entity.
Need the workbook? Click here - Download the Workbook
Alright, let’s get to the good stuff! There’s a lot of info here, so bookmark this post to come back to as needed.
Do you need an LLC?
Some things to know:
LLC (Limited Liability Company) is a legal term and having one protects you in case of a lawsuit. This is an important protection but you have to follow the rules for it to be fully effective.
LLCs exist to separate the owner’s personal assets from the business’s assets in the event of debt or litigation. Assets include tangible items like cash and savings, transportation, real estate, merch inventory, gear, etc., and intangibles like copyrights, trademarks, and patents. In general, an asset is something you can resell (even if you take a loss).
The biggest question you need to ask yourself is: Does the business exist outside of myself as the owner? In other words, does the business operate under a “Corporate Veil?"
In the event of a lawsuit, the lawyers will spend time trying to establish whether or not you operated the business under the “Corporate Veil.” In short, the Corporate Veil means your personal and business finances are separated, you have invoices and deposits for all sales, receipts for all expenses, and you’re not doing things “under the table.” Read more about that here.
If you know you cannot maintain the Corporate Veil, ask yourself if it's worth the expense and time to get an LLC. *(side note: most of my clients do form LLCs as soon as they are signing contracts and taking income).
Some instances when it might be recommended or necessary for you to have an LLC are:
If you have significant personal assets (including home, car, savings and retirement accounts and your spouse's assets if you file a joint return).
If you have significant business assets (including transportation, gear, real estate).
If there are other individuals that represent the business, especially if they are signing contracts or using the bank account / credit line.
To get an LLC, consult with a local CPA, attorney, or start-up service provider like an incubator or university center for small businesses. There are also several digital legal options including LegalZoom and RocketLawyer.
If you want to separate your business from your personal life but do not need an LLC, a DBA might be a good solution for you.
A DBA, or “doing business as” is a designation by the state that allows you to use an operating name that is different from your legal name. In this case, you can register the company as “First Name Last Name”, obtain an EIN, and file for a DBA of “Band Name.” This allows you to accept payments made out to Band Name but keeps the legal entity attached to your personal name. Read more about that here.
Quick note about LLCs and taxes - having an LLC does not determine what tax form you’ll file for your business. A business can be an LLC and file as a sole proprietor, a partnership, or an S-Corp (each files a different tax return). LLC is a legal term. You must also choose a tax entity.
Sole Proprietors file tax form Schedule C, which is attached to their individual 1040. The taxable income is included as Self-Employment income on the 1040.
Business Partnerships file form 1065, which is its own tax return. The taxable income is listed on form K-1, which must be included on the 1040. This income is taxed as Self-Employment income on the 1040. (Note: some other partnerships file form 1041, so consult a tax pro if you aren’t sure which to use).
S-Corps file form 1120-S, which is its own tax form. The taxable income is listed on form K-1, which must be included on the 1040. The income is NOT taxed as Self-Employment income on the 1040.
Self-Employment income is subject to income tax AND an additional 15.3% FICA tax, which includes your contributions to Social Security and Medicare. Be sure to factor FICA tax into your tax entity decision.
This article by Bench Accounting summarizes S-Corp taxes beautifully.
Note about non-profits: Non-profits are not businesses in the traditional sense. Due to their income structure (donations) and tax exempt status, they follow an entirely different set of rules. Check out this page on RocketLawyer for more info.
Do you need an EIN?
An EIN is a taxpayer ID number that separates the business from the owner.
If you do not have an EIN, you will use your personal Social Security number on your W-9 and any time you get paid.
The W-9 is an official form furnished by the IRS for employers or other entities to verify the name, address, and tax identification number of an individual receiving income. The information taken from a W-9 form is often used to generate a 1099 tax form, which is required for income tax filing purposes. Download a W-9 form here.
Consider getting an EIN if you are giving your W-9 form out to new people on a regular basis and if you expect to get a 1099-NEC from anyone.
Any tax entity can get an EIN. Partnerships and S-Corps MUST have an EIN.
You must have an EIN if:
you have employees
you are applying for a business bank account
you have a partnership, or S-Corp, or
you are a sole-proprietor who plans to operate under a corporate veil.
EINs are free and the application is online.
Do you need any certifications or licenses?
In some states, certifications or licenses are required for managers and agents to operate. Check your state here
There could be certifications or licenses necessary for merch (especially for kids or babies), events (check your local city hall), coaches, teachers, accountants, etc. Be sure to check with your local regulations or consult a mentor.
*(Side note - one key factor to a business’s success is having a qualified mentor to look up to, run ideas by, and get useful advice. Asking a mentor how they set up their company, what certifications they earned, and what they wish they had known can be priceless. If you aren’t sure who to turn to, shoot me an email).
Do you need a sales tax license?
If you’re creating merch goods, like shirts, posters, or CDs, you may need to pay sales tax to the state on what you sold. You might also owe sales tax on digital items sold. It can get complicated, but don’t worry. Read through this Shopify article and consult a local tax pro for help.
*(Sales tax question? Email us).
Starting a business can be scary, but help is here for you. As a business manager, I have prepared over 1500 tax returns, and helped dozens of new clients start businesses. I created the Start-up Essentials Workbook to help you move through the first, confusing steps of starting your business. Having a solid start and a legitimate business will give you the confidence you need to get out there and make magic.
Not ready to purchase the workbook? We created a FREE 32-step guide to starting your business. Click here to download the guide.
In Part 2 of this series we will talk about publishing, copyright, and trademarks, so stay tuned!
You’re awesome, and I can’t wait to hear what you create.
-Steph
PS - my lawyer said I have to include this disclaimer:
All information provided here is for educational and informative purposes and is not intended to be personalized tax advice. All tax situations are different; consult a local tax pro or attorney with questions.