I know. I know. Thinking about your band and your music as a business venture may make you feel a bit uneasy, but if you’re an independent artist, thinking this way can put you on the path towards a sustainable music career and enable you to do more of what you love: Creating music!
In my new free massive open online course on Coursera, Navigate the Music Business as an Independent Artist, I share five tips for turning your band into a business. Read on for an overview and learn how to make the most out of your music.
Please note: The information shared in this post refers to the United States only. Check your local laws and tax code for information that is specific to your area.
1. Incorporate as an LLC
An LLC, or limited liability company, is a corporate structure where the members of the company cannot be held personally liable for the company’s debts and liabilities. Let’s say you and your band get into some legal trouble – for example, a venue is suing you for allegedly damaging some of their equipment. And let’s say you lost the course case and owe that venue money. If you have not incorporated as an LLC, you can be held personally liable – meaning, the venue can go after your personal assets such as a car, house, or any personal savings accounts. If you have incorporated as an LLC, then that venue can only go after any assets owned by that LLC (which probably isn’t much if you’re just starting out). Incorporating as an LLC is essential for legally protecting yourself and your bandmates.
A note to songwriters: You may not need an LLC, but you should absolutely register a publishing company. Why? As Berklee Online music business course author and instructor John Kellogg says, “Every time music gets played, somebody gets paid.” You want to ensure that somebody is you.
As a songwriter, when you register with a performing rights company (BMI, ASCAP, or SESAC), you’re entitled to the writer’s share of the royalty for a song, which is 50%. That other 50% goes to the publisher. If you are an indie songwriter and are not affiliated with any publisher, you’re essentially leaving that other 50% on the table. If you incorporate as your own publishing company and then register your songs as the publisher with the performing rights company, then you’ll receive the full 100% of the royalties owed.
Registering a publishing company is really easy. Simply go to your local City Clerk’s office and request to fill out a Business Registration form. Complete the form, pay a small fee (usually no more than $80), and viola! You’re officially the founder and president of a new publishing company. Finally, you’ll need to register your new publishing company with your performance rights organization (PRO) and list your publishing company as the publisher for your songs."Incorporating as an LLC is essential for legally protecting yourself and your bandmates." Click To Tweet
Last but not least, there is one other major benefit to incorporating: You can open a corporate bank account. Having a corporate bank account that manages all of your band expenses will make managing your money and filing taxes much clearer – that way, you’re not intermingling your personal and professional expenses.
2. Decide whether your bandmates are employees or independent contractors.
Either way, you should absolutely have your bandmates fill out the appropriate tax forms. Why? Well, let’s say your band makes $10,000 in one year. You, being the generous and benevolent bandleader that you are, decide to pay your bandmates $8,000 of that total $10,000. When it’s time to do your taxes, you are required to report that $10,000 as income. However, you can also report your expenses, including salary (for employees) or contractor fees (for independent contractors). These expenses are deducted from the total amount of money you owe taxes on. So, since you paid your bandmates $8,000, you’ll only owe taxes on $2,000 (because $10,000 – $8,000 = $2,000). Again, make sure you have your bandmates complete the appropriate tax forms. You’ll need these so that the IRS can confirm that you’re not lying about your expenses.
So, what are these forms? You’ll need different forms depending on whether your bandmates are employees or independent contractors. An employee fills out a W4 and an independent contractor fills out a W9. The main difference between the two is that employees have taxes withheld from their paychecks (federal, state, local, etc.) whereas independent contractors do not and are required to pay their own taxes. Be aware that if you do not manage your taxes properly, or if you categorize your bandmates incorrectly, you may be audited and charged fees by the IRS.
To learn more about this process and decide which forms to give your bandmates, visit the IRS’s website at www.irs.gov.
3. Keep track of your income.
This may seem obvious, but when you’re gigging and touring and money is flying all over the place, it can become difficult to keep track of how much you’re bringing in. It’s important to keep track of your income because, again, at the end of the year, it’ll be time to do those taxes.
If you overreport how much money you brought in, you’ll be paying too much in taxes, which is not fun for anyone. But, on the flip side, if you underreport how much money you’re bringing in, you won’t be paying enough in taxes and could incur fees later. You could get into some serious trouble with the IRS, even if it is an honest mistake. Here are some ways you can keep track of your income:
- Keep an income journal. Every time you get paid, create an entry.
- Keep an online ledger that is saved in the cloud so you can access it from anywhere.
- Download a money management app to help you keep track of income.
4. Keep track of your expenses.
In Tip #2, we talked about subtracting the amount you pay to your bandmates from your total income. The same can be done with business related expenses, such as sound equipment, recording software, gas to and from gigs, even guitar strings. These expenses are called “write offs.” As a business, you’re able to “write off” these business related expenses from your yearly income, thus lowering the amount you’ll owe taxes on.
There is one small catch: In order to “write off” an expense, you’ll need to keep your receipt of that expense as proof that you actually spent that money on your business. Here are some tips to help you keep track of your expenses:
- Purchase a mini file folder and carry it with you always. Any time you make a business related purchase, place the receipt in the folder.
- If you carry a wallet, designate a special slot just for business related receipts and empty them into a safe file at home. At the end of every month, be sure to file your receipts regularly because the ink will fade if kept in a wallet for too long!
- If you’re really organized, keep a ledger of your expenses and update it weekly (a little time now saves a lot of time later).
- When paying your bandmates, use an app like Venmo to help you easily keep track of how much you’ve paid them.
5. Meet with a Certified Public Accountant (CPA)
Although I’ve listed this as Tip #5, it really should be at the top of the list. If you’re ever confused about your finances or taxes, don’t just wing it and hope for the best. Take the time to meet with a CPA. They will be able to answer all of your questions and also share additional tips and tricks to help you manage your finances effectively. They’re experts when it comes to the tax code and will be able to help you file your taxes correctly. And should the need arise, they’ll also be able to help you through an audit from the IRS.
If you’d like to learn more about navigating the music industry as an independent artist, including how to manage a band, planning and recording a record, and launching and running a successful crowdfunding campaign, check out my new course on Coursera!