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Exploring Business Structures for Musicians

As a musician, picking the right business entity type can feel overwhelming. With so many different business types to choose from, it can be difficult to decide which one is right for you. Please note that this article is designed to help you understand the lay of the land of entity types in the music industry and is not a substitute for legal advice. 

This article will explore the most common business entity types for musicians, namely sole proprietorships and limited liability companies (LLCs). We will discuss the key features and benefits of each, so you can make an informed decision about which is the best option for your needs. We'll also talk about S corps - which is a tax designation, not an entity type.

What is a sole proprietorship?

A sole proprietorship is the simplest and most popular business structure for many musicians. It's the default option when a single person starts a business, as it doesn't involve any paperwork to set up.

If you haven't set up any entity before but make or spend money as a musician, then you are, by default, a sole proprietor. You should check with your state and local government to see if you need a permit to perform. Usually, if you do street performances or busk, some locations require permits. When you play at a bar or venue, it is the venue owner's responsibility to obtain the license required to host live music.

Sole proprietors have the option to choose and register a business name. Registering your DBA (doing business as) is often necessary for sole proprietors to open a business bank account.

With a sole proprietorship, you're the sole owner of the business and are fully responsible for its debts and liabilities. However, it's important to note that your personal assets are not protected if you get sued or your business is unable to pay its debts. In other words, you may be obligated to pay business debts or damages awarded against your business in lawsuits from your personal savings or assets.

What is an LLC?

An LLC is a popular alternative to a sole proprietorship for musicians because it offers asset protection and may provide tax advantages. This business structure limits the owner's liability for the debts and obligations of the business–hence the name limited liability company!

An LLC also enables pass-through taxation. This means that the LLC itself doesn't pay taxes. In an LLC owned by one owner, the LLC is disregarded for federal tax purposes, and with multiple owners by default, the LLC is treated as a partnership for tax purposes. Therefore, the profits and losses of the business are passed through to the owner's or owners’ personal tax return(s). Setting up an LLC requires filing paperwork with the state and paying a filing fee, but it's fairly straightforward and can often be done online with or without the assistance of an attorney, depending on how comfortable you are with completing the filing yourself.

With an LLC, you may apply for an EIN (employer identification number) from the IRS, which you can use to open up a bank account, fill out W9s for your music project, and even hire and pay employees down the road.

What is an S Corp?

An S Corp is an optional tax designation for LLCs that may help you save on taxes. Because filing an S election can result in additional tax filings and costs at the end of each year, you should consult with a CPA or tax advisor to confirm whether making an election to be treated as an S Corp makes sense for you. For musicians just starting out, filing an S election will not save enough in taxes to justify the additional administrative cost and burden of maintaining the S Corp.

In order to qualify for this tax designation, the LLC must be a domestic entity and satisfy the IRS requirements, which include having no more than 100 shareholders and not having two classes of stock. When you form an LLC and elect to be an S Corp, the LLC will be taxed as an S Corp for federal tax purposes. Similar to the disregarded entity or partnership treatment tax treatment of S Corp and LLCs, income and losses pass through to the owners and are taxed on their respective personal tax returns.

Deciding which entity type is right for you

Ultimately, the decision of what type of business structure to use for your music project depends on your unique goals and circumstances. For most musicians, a sole proprietorship is the simplest and least expensive option. Simplest is not necessarily best.

If you'd like more flexibility, need asset protection, are making a significant income from music, own expensive equipment for your music project, or employ a team, then an LLC may be the better choice.

Our lawyer, over at DMC Law, was kind enough to share his two cents on this topic:

Adding an LLC is helpful if either of the following applies to the performer:

1) They are performing more regularly, releasing songs, etc. If you are engaging in any regular and repeated activities that expose you to potential liability, then having an LLC provides a limited liability shield.

2) If there are multiple “owners” of the band, then having an LLC provides for how to deal with ownership of song rights and departures from the band. If you don’t have an entity then everything is jointly owned and you are operating a general partnership (an unincorporated business) where the rules are largely established in the applicable state law and owners may be unpleasantly surprised if there is ever a dispute.

Finally, if you are operating at a strong profit and would like to prioritize reducing your overall tax burden, then it might be worth exploring filing an LLC with an S Corp tax designation.

FAQ

Are most bands LLCs?

The most common business structure for solo musicians or bands early in their careers is a sole proprietorship. This doesn't mean it is the best option. LLCs tend to be more relevant when there is more revenue, more business assets, and more owners of a band.

How do I set up an LLC?

How to set up an LLC varies from state to state. Generally, it involves filing paperwork with your state and paying a filing fee. In addition, you may need to register your LLC with your county and obtain an employer ID number (“EIN”) from the IRS. You can find more detailed instructions on setting up an LLC here.

Which entity type is right for me?

As unsatisfying as this answer may be, it really depends on your situation. If you are early on in your music career and don't have any business partners, it likely makes sense to operate as a sole proprietorship until you are regularly performing and releasing music. As you grow your music business and see a greater need to separate your personal finance and assets from the business, then it is time to think about becoming an LLC!

Disclaimer: We have done our best to ensure the accuracy of the information in this and all other blog posts on our website. Our posts are meant to help educate and do not constitute legal, financial, or tax advice.

Sophie Randolph

Sophie Randolph is the founder of Green Room, an artist manager, and holds her MBA from Rice University.

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