A generation grew up practicing “duck and cover” in the 1950’s at school to protect themselves in the event of a nuclear attack. After you saw the flash of a nuclear weapon, you were to assume the fetal position, lying face-down and covering their heads with their arms … hoping this would save them from Armageddon. Sometimes the plan is not very good (i.e. ducking and covering from a nuclear blast), but other preventative measures are a must and can bring immediate benefits. As an attorney, I am trained to imagine the worst possible scenario and obsess about it coming true, and part of my job is to prevent bad things from happening to my clients in the first place. Whether musicians realize it or not, danger lurks around every corner and the potential to lose everything threatens every time you leave your house.
That may be slightly overdramatic, but the music industry can be a very scary place, as an artist tries to avoid lawsuits, maximize his exposure, and figure out little things with very big consequences – like taxes. However, many of these issues can be taken care of at the same time with a fairly simple procedure: form a Limited Liability Company (LLC). An LLC is a business form that provides limited personal liability and flexible tax benefits without the difficulty of managing a corporation. It is perfect for organizations like bands.
For example the newly formed band Minotaur is getting ready for its first gig at Mom’s Music Club in gorgeous Millstadt, Illinois. Part of the stage show involves pyrotechnics, and during the first song a flash-pot misfires and catches a curtain on fire. The resulting inferno destroys the venue and a ball of fire shoots from the blaze onto the band’s tour van, knocking the van on top of a very expensive row of cars. The lawyers have a field day, filing lawsuits against the four band members. Every member of the band ends up losing his instrument, his car, and his house while destroying his credit and forcing him into bankruptcy.
If Minotaur spent a small amount of money on the filing fee and about an hour of their time, they could have formed an LLC to avoid the situation; an ounce of prevention could have saved their personal lives. Mom’s and the car owners could not sue the individual members of the band – they could only sue Minotaur, LLC. Since the band members were acting in the course of their employment with the LLC, then a lawsuit can only seek the LLC’s assets – not the personal assets of the members. In this case, the LLC would have some money (either contributed from the band members or from getting paid to play), and the tour van should also be owned by the LLC. Just like any other business, an LLC can own things because it is an entity on its own. It can also make and borrow money, sell items, carry insurance, sue and be sued. Importantly, an LLC does not protect its members from intentional acts.
An LLC can be formed very quickly, but with a little forethought, almost any problem a band can face can be handled within the LLC. For instance, a barebones LLC in Missouri only requires filing a one page form with the secretary of state. However, you can also file an Operating Agreement for the LLC, which governs how the business (i.e. the band) will run. I highly recommend addressing, at a minimum, the following situations within an operating agreement:
• Who owns the band name? Remember the LLC can own the name too.
• How are any profits divided? When are the divided?
• How are royalty rights divided?
• What happens when someone leaves the group?
• How do you add someone to the group? Or remove someone?
• When does the LLC end?
This list only scratches the surface of possible issues that can arise in the course of running a business, and do not think for a moment that a band is anything less. Forming an LLC provides a musician the greatest possible protection from creditors and mishaps, while allowing the greatest flexibility in how things really work within a band. Solo performers can reap the same benefits from an LLC, although they have fewer issues to address within the operating agreement. It is highly recommended that you consult with an entertainment attorney when preparing your LLC, as he can guide your group through the finer points of the paperwork that are relevant to a musician’s specialized needs.
Matthew Nagel is an entertainment attorney at Wuestling & James in St. Louis, Missouri and an adjunct professor at Fontbonne University and Washington University School of Law. If you have questions, you can reach him at matt@sne-entertainment.com
* This article is primarily educational and does not purport to constitute legal advice. No attorney-client relationship is created between the author and any reader of this article. If you have legal concerns or questions be sure to consult with an attorney licensed to practice in your jurisdiction.
