To Be an LLC, or Not To Be an LLC
When I was 17 years-old and still sporting a soccer mullet, my humble and modest band was asked by another band to share a bill at a local high school auditorium. The other band was much older with more road experience and had recruited us to play the show because we had a reputation for pulling large crowds. As part of the deal, our band would be paid a sizeable, guaranteed fee and the other band would set up the logistics. In return, our band would be the headliner (to ensure that our crowd would sit through the entire show) and our equipment would be used (i.e. mixing console, microphones, speakers, stage monitors, etc.). The deal was struck. During sound check, and while “Joe” from the other band was operating our equipment, two woofers were blown. Nice woofers. It probably took us 20 gigs to purchase those speaker cabinets. In a panic, I did what any young rocker would do. I sped to my lawyer’s house and advised him of the situation. (No cell phones back then). My lawyer, still in the middle of his morning bathroom routine counseled that I needed to write up a document whereby Joe and his bandmates needed to agree to pay for the blown speakers. “What if they don’t agree,” I asked. If they didn’t agree, I was told to pull the equipment and cancel the show. “Thanks Dad,” I said and sped back to the auditorium.
When presented with my handwritten contract, the other band balked and Joe tried to argue that the speakers had already been blown. Not true, according to my drummer/expert witness who was headed to Virginia Tech on a full engineering scholarship. Bam! As people started filling the auditorium, we started pulling cables and packing up. It worked. The other band caved and begrudgingly signed the agreement on the top of a bass amp, the signature bearing the squiggly contour of the amp’s surface.
At the music store, Joe showed up and pulled a wad of cash out of his Velcro-secured wallet – cash that belonged to Joe and his bandmates.
I think of this anecdote when I am asked by musicians why they should set up a limited liability company for their bands. If Joe & Co. had set up their enterprise as a limited liability company (LLC), my remedy as a woofer-less victim would have been limited to making demand on the company’s assets. The LLC might have shielded Joe’s Velcro wallet.
It’s safe to say that probably 95 percent of the working bands and musicians out there are operating as a legal partnership without knowing it. In Virginia, as most other states, if you are sharing your income and expenses equally without having formed a corporate entity, the law will create a partnership wherein all members to the partnership assume liabilities of the operation. This sets up a scenario where partner A can obligate partner B without partner B’s consent or knowledge. Most of the musicians I deal with are focused primarily on growing his/her band, making sure everyone shows to practice, dealing with logistical challenges that touring presents, etc. Financial and legal liabilities aren’t really on the radar screen during a musician’s formative years. Lawsuits, demands, claims, etc., generally follow money. Note I say generally.
Conducting your business through a corporation or LLC establishes a corporate veil that protects members from personal liability. The caveat is you need to take care of the LLC and do what is legally necessary to maintain that corporate veil. Nonetheless, the veil can be very effective in shielding individuals from would-be creditors or plaintiffs.
Oftentimes bands will struggle to determine when to convert their partnership to either a corporation or limited liability company. My answer is probably quite frustrating to most – corporate protection is never an issue. Until it is. Not every musician or band hits that point of critical mass when it makes sense to set up a corporation or limited liability company. If you’re touring, taking in money, spending money, distributing music, the reasons for not setting up an LLC start falling away.
Whether you should set up a corporation or LLC is an issue for your attorney to resolve. A LLC in Virginia is a bit easier to set up and manage. There are a number of factors specific to setting up a LLC for a band so again, ask your attorney but wait until he’s out of the bathroom.