In my experience, most musicians just want to make music and not be bothered with the business aspect of running a band. Like it or not, at its most basic level, a band is a business. It has income and expenses that need to be tracked, taxes that need to be paid, and business decisions that need to be made. And, since a band is a business, it's very important that the members decide early on how the business will be operated. Should the band form a business entity like an LLC or a corporation? Or, should they operate under a more informal structure such as a general partnership? Most bands opt for the partnership option because it's the easiest to set up and operate.
What is a partnership?
A partnership is an association of two or more people who decide to engage in a business enterprise in which all income and and debts are equally shared by the partners. This basically means that a group of people get together and agree to start a business. By default the law states that each partner shares equally in all the profits and expenses. So, if your four person band makes a net profit of $1,000 in a single year, the law will view it as each member individually making $250 regardless of how much they're actually paid. Along the same lines, if the same band takes out a $10,000 loan to buy a tour van, then each member will be personally on the hook for the loan.
Similarly, each member is also personally liable for the actions of the band. So, if your lead singer stage-dives and accidentally knocks out a fan's teeth, then, you guessed it, the band can be sued and each member is personally liable for the costs of those dentist bills. This is one of the downsides of a partnership and why it's wise to consider forming another business entity -- for example, an LLC ("Limited Liability Company") which protects its members from personal liability.
How do I form a partnership?
To form a general partnership, in most states you just need to get together with your partners and start doing business. To open a bank account, many banks only require a signed partnership agreement and a Federal Tax ID number (which you can get from the IRS website in a few minutes).
What is a partnership agreement?
A partnership agreement is a contract between the partners setting up how the business will be run. So, when the time comes, all the members of your band should sit down and decide a few important things, such as who can write checks from the band's bank account, which decisions require a majority vote, how much start-up much money each member will invest in the band, etc.
What if someone leaves?
Another important issue is how exiting members will be treated. Will they still have the right to use the band's name? Will they still get artist royalties? Most bands don't like to think about any of the members leaving, but the simple truth is that many things can happen: members can get married, get jobs, get thrown in jail. It's important to figure out how to deal with members who leave the band.
I know this article may seem like a giant buzzkill, but it's worth taking the time to address these issues in the beginning stages of your band's career. Believe me, once money and success become involved, it's much harder to get all this sorted out. Please contact us for a consultation if you need help setting up your band's business.
Note: Kamal Moo is a California licensed attorney. The information contained in this article is not individualized legal advice. Reading this article does not create an attorney-client privilege. You should consult with an attorney if you need legal advice.