Band Business Formation Part IV: LLCs for Bands
I’m the bass player for a band, and I just got a 1099 form in the mail from a venue we played at six months ago. Does this mean I have to pay taxes on the money that was paid to the whole band?
Making money playing music is nice. Paying income taxes on that money is not quite as nice, but necessary. Paying income taxes on the money your bandmates got paid? Not good at all.
If you have not created a legal entity for your band, then pay from gigs will be handed to one of the band members. Often, that payment will be in the form of a check, and one band member will need to fill out a W-9 form – the form that tells the IRS who will have to pay the taxes on that income.
Some bands handle this informally by rotating who the tax victim will be at each venue. Inevitably the burden winds up falling more heavily on one band member than on the others.
In our last article, we discussed how a band partnership can get an EIN, open a bank account, and serve as a vehicle to track the band income and expenses, making sure that band members only pay taxes on their portion of the gig fees.
An LLC – limited liability company – provides those same advantages, but there are a number of reasons why forming an LLC is preferable to a partnership agreement. One advantage is that partners are each individually liable for all the debts of the partnership; members of an LLC are not personally liable for the debts of the LLC. The longer you are in the live performance business, the more you might appreciate the insulation from liability provided by a formal entity like an LLC (everything that can go wrong will in fact eventually go wrong).
Similar to a partnership agreement, an LLC Operating Agreement sets out the framework of who is responsible for what tasks, whether there is compensation for those tasks (for example, if one member works as the booking agent), who has authority to write checks or make decisions, how expenses will be paid and how income will be split up.
A band LLC Operating Agreement can spell out the process by which band members leave and new band members come in. Instead of having to wholly dissolve the band, lose the name, or sell off the equipment because no one can agree as to who owns which light rack when a band member quits, the band as an LLC can continue doing business, and the departing band member only takes with them whatever is spelled out in the LLC Operating Agreement. Remember to include copyrights and royalties in your Operating Agreement, designating who will hold them and what happens to them if a band member leaves.
To form a band LLC:
Decide on a name, and register the name as a “DBA” (doing-business-as) or trade name with the appropriate office in your state. There will be a modest fee for registering the trade name. Be sure to note a reminder in your calendar to renew the trade name registration every year, or as required by your state.
Fill out your LLC Articles of Organization and file it online in your state with the requisite filing fee. The Articles of Organization will name your officers (president, secretary, treasurer) and a registered agent (the person to whom correspondence or notices of lawsuits will be sent). You’ll need to file an annual report (some states require this only every several years) along with a fee to keep the LLC active.
Draw up your Operating Agreement, and adopt it at your first official LLC Annual Meeting. LLC Operating Agreements are more complex than partnership agreements, and you may wish to consult with a business attorney in your state before you write or sign one.
Get an EIN from the IRS online for your new LLC. There’s a one-time fee for having the IRS assign an EIN.
Take that EIN and copy of your Articles of Organization and Operating Agreement to the bank and open a bank account for the band. Be sure that any checks paid to the band are made out to the band name and deposited in the LLC account. If you complete a W-9 for a venue, use the band EIN.
Decide how you’ll keep careful track of expenses, receipts etc.
Find a bookkeeper/tax preparer who can prepare the LLC tax return at the end of the year. Most LLCs are taxed as partnerships; each band member gets a copy of the the K-1 partnership tax return form and will report their portion of the profits on their own income tax returns.
If you are going full-time with your band, a more complex structure like a business corporation may be the more protective and effective option. We’ll talk about these in the next post. But for most bands, the LLC is ideal.
