A band is a business. Like any business, the band members should agree upfront how the business is going to be run, how revenues will be distributed, and what happens if one or more members leaves the band.
Organizing and putting down in writing the rights of each band member is far easier and less expensive then waiting for a dispute and "lawyering up" for an expensive lawsuit.
Partnership vs. Limited Liability Company vs. Corporation
Should your band formally create a company?
Typically the first decision the band needs to make is whether to formally create a company registered with a state or whether a simple partnership agreement among the band members is sufficient.
The answer to this question is easy: create a company (either a limited liability company or a corporation) registered with a state. There are two main reasons for this.
First, the additional costs to form an LLC or a corporation are minimal -- in Nevada for example the government fees to form either are as low as $200. For a few hundred dollars more an attorney will put together the paperwork for you and act as the band's resident agent (to receive legal notices and lawsuits).
Second, and most importantly, a limited liability company or a corporation provides individual liability protection for each band member. What this means is that if your band breaches a contract or incurs some other liability, only the company will be liable. By contrast, if your band has merely formed a partnership, each band member is individually liable for all of the debts and liabilities incurred by the band. And let's be honest, most band members do not want to be individually responsible for all activities of the band (especially that bamboo t-shirt deal signed by the bass player who has been a little bit "off" lately).
If so, what type of company should your musical group form?
Once it is decided that the band will create a company registered with the state, the next question is "what kind of entity"? Should the band go with a limited liability company, a Subchapter "S" corporation, or a "C" corporation? While all three entities will work equally well for limited liability protection, in the context of a band with multiple owners the best entity type is a limited liability company. There are three main reasons for this.
First, although there are different tax rules for each type of entity, a limited liability can choose which tax rules it wants to follow. This means that if your accountant decides that a C-Corp is best "tax entity" for your band, he or she can file a one page form with the IRS and elect C-Corp tax status for your band's limited liability company.
Second, a limited liability company provides the most flexibility for a band as far as ownership, decision making, and revenue distribution are concerned. For example, maybe one of the band members designs most of the T-shirt and should be entitled to a higher percentage of t-shirt sales. Or maybe the singer writes all of the bands music and should get 100% of the songwriter income while allowing all of the band members an equal share of the song publishing income. Or maybe two of the band members founded the band and should get more voting rights when determining who can join the band and who should be kicked out. With a limited liability company the band members are free to agree to whatever rights and rules they come up with. A corporation, by contrast, has a more ridged structure for distributions and decision making. While it is possible to set up a corporation to work like a highly customized limited liability company the processes is often convoluted and cumbersome.
Third, in Nevada (and many other states), judgments against the owners of a limited liability company are limited to "charging orders." With a charging order the creditor can only wait and hope that the band makes a distribution to its band members. The creditor has no say in the band's business affairs and never obtains any voting rights in the business. For example, if one of the individual band members gets in trouble (e.g. the drummer knocks out a heckler and gets sued individually) any judgment the heckler gets against the drummer can only be enforced against the band with a "charging order." In order to collect on a judgment using a charging order the heckler must wait for the band to make a distribution to the drummer (and for sound business reasons the band may decided not make any distributions for several years). By contrast, if the band was a corporation with stock, many states would allow the heckler to seize the drummer's stock certificates and give the heckler voting rights in the band.
What company rules and ownership rights are important for musicians?
There are numerous issues for the band members to consider when setting out the rules for the band and the rights of each band member. Some of the bigger issues to consider are:
Your band should take the time to talk about and consider all of the business aspects of the band. Talking about these issues upfront and spending a small amount of money now will save your band fights, headaches, and expenses down the road.