I cant stress enough how important it is as musical entrepreneurs to incorporate on the level thats best for you. So lets look at the levels.
The information below is only meant to be an outline/overview. Those of you who have never researched incorporating. If you are seriously considering forming any type of legal structure, do detailed research and consult with a lawyer to find out all the rules, regulations, laws and updates. Doing so is well worth the education and business practice.
Types of Legal Structures
All companies operate under one of four broad legal classifications. I will outline each structure. I cannot go into deep detail on each so those interested in knowing more must do some research on your own when time permits.
The easiest and least expensive way to start a business is by forming a Sole Proprietorship. You have complete control over everything. You make all the decisions and benefit from its success in profits or suffer the consequences of its losses. If you are using your own name as the business name, all you need is a business license and your business cards! If youre not using your name then you would need to apply for a DBA. This is a certificate of Doing Business under an Assumed Name. This ensures that two businesses dont operate under the same name in the same county.
You can apply for a DBA certificate at most county clerks offices. The total cost (last time I checked) was $35.00. This covers a name search and the filing fees.
A partnership is two or more people sharing the assets, liabilities and profits of the business. Its a bit better then a sole proprietorship in that more people are sharing in the responsibilities of the business and can also bounce ideas off of each other. Each partner uses any property owned by the partnership and shares in the profits and its success. Unless other wise stated in the partnership agreement, partners dont have to share equally in profits and losses. Ownership of the partnership can be divided in any manner the partners agree on. In a partnership, personal debts of an individual partner cannot be attached to the other partners.
As per liabilities in a partnership you are increasing the risk simply because each partner becomes liable for the obligations incurred by other partners while conducting business. If a partner contracts or makes a deal on behalf of the partnership, then that partner just bound the partnership to deliver!
Other types of partnerships Include
Limited Partners- Generally limited to the amount of their investment
Secret Partners- Active in the ventures but unknown to the public
Silent Partners- Usually inactive with only a financial interest in the partnership
As musicians and artists, its best to think of a partnership similar to being in a band. Everyone in the band is a partner. Usually unless you have a written partnership agreement, everyone wants to be the leader, or someone feels that they are contributing more to the band/partnership than the other members/partners. Im sure we all have experienced this at one time or another during our careers. If you consider a partnership as the best legal structure for your situation, then I highly recommend a partnership agreement. When it comes to structuring a company, you must be able to separate business from family and friends. You want to put an agreement in place so that you will have piece of mind during the term of the partnership agreement knowing that your interest is protected. Keep in mind that without a partnership agreement, all partners are equal under the law!
Partnership Agreements should address the following:
1) The legal name of the partnership
2) The nature of business
3) How long the partnership will last
4) What each partner is contributing to the partnership (Example: money, instruments, contacts)
5) Sales loans or leases to the partnership
6) Who is responsible for what (Partnership management. Most bands should have this clause)
7) The sale of the partnership interest (restricting partners from selling their partnership to third parties)
8) How the partnership can be dissolved
9) What happens if a partner leaves or dies
10) How disputes will be resolved (another good basic clause for bands)
S-Corporations are financial vehicles to pass company profits and losses through to owners who pay income taxes at their personal tax rates. In general they are nothing like a C-Corp. An S-Corp cannot be a financial institution, a foreign corporation, or a subsidiary of a parent company. If at some point you change from an S-Corp to a C-Corp you cannot go back to an S-Corp for five years. S-Corps are good if your business generates a lot of cash. If not, you easily run the risk of owing taxes on your profits while the business is not making any cash to pay them.
Limited Liability Co.
(LLC) – The LLC is the new kid on the block compared to the other structures. It has become very popular for many entrepreneurs. An LLC combines the best of a partnership (pass through earnings) and the best of the corporate form (limited liability). Ordinarily, only the LLC is responsible for the company’s debts, shielding the members from individual liability. However, there are some exceptions where individual members may be held liable. Like limited partnerships and corporations, an LLC is recognized as a separate legal entity from its “members.”
The “C-Corporation” refers to a standard, general-for-profit, state-formed corporation. The Board of Directors is responsible for the Management and policy decisions of the corporation. Corporate officers are elected by the Board of Directors and are responsible for conducting the day-to-day operational activities of the corporation. Corporate officers usually consist of the following: (President, Vice-President, Secretary, Treasurer).
Those who run the corporation must observe corporate formalities, to retain the corporate existence and thus the benefits of limited liability and special tax treatment. Annual meetings must be held, corporate minutes of the meetings must be taken, officers must be appointed, and shares must be issued to shareholders. Most importantly, the corporation should issue stock to its shareholders and keep adequate capitalization on hand to cover any “foreseeable” business debts.
Corporations may offer employees unique fringe benefits. For example, owner-employees may deduct health insurance premiums paid by the corporation from corporate income. In addition, Corporate-defined benefit plans often afford better retirement options and benefits than those offered by non-corporate plans.
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