Band Business Formation Part VI: Divorce and Bankruptcy
Our bass player is getting divorced, and the lawyer for her soon-to-be-ex-husband just sent the rest of us subpoenas to produce all the band equipment and list its value. Seriously, what right does a band member’s spouse have to the PA and our instruments?
Death and taxes may be certain, but divorce and bankruptcy are only slightly behind them: frequent, foreseeable, and often unpleasant.
Divorce and bankruptcy can be made even more miserable when fellow band-members get dragged into it. But why should a divorcing spouse or a bankruptcy trustee be able to demand information on band assets? Or worse yet, demand that band gear be turned over or sold?
The answer is both shocking, and shockingly simple: If you have not done anything about creating a formal band entity, the legal system assumes that your band is a joint business venture operating as a partnership. That means each band member has some legal interest in any assets or property (aka “stuff”) owned by “the band”.
Many bands, for example, pitch in together to buy a PA system, wireless microphones, or a van for travel to gigs, or put all the gig money in a fund to pay for studio recordings. Each band member then owns some percentage of that equipment as well as the intellectual property rights (including rights to a portion of the royalties) to any visual and sound recordings.
The soon-to-be-ex-spouses of band members, or trustees assigned by the bankruptcy court to collect all the bankrupt person’s assets, have a legal right to ask for information about those band assets, and to do what is necessary to figure out what those assets are worth and what percentage of them is owned by the divorcing or bankrupt band member.
While the law usually presumes a band is operating as a partnership, because they are engaged in a joint venture for profit, if one band member has been buying all the band equipment using his or her personal credit card, the situation may be even more gloomy. If “Joe” has bought a huge PA, stage lighting, custom cases for touring, all on his personal credit card, and is storing them in his basement – and if the other band members have contributed to these purchases by giving Joe cash that was never accounted for in band financial ledgers – all that equipment is likely to be considered legally Joe’s, ripe for the taking by his divorcing spouse or the bankruptcy process.
Protecting that equipment from the creditors and spurned spouses of one of the band members is a superb reason to consider creating a formal band entity. It’s fine for your band to operate as a partnership, but rather than leaving it to the judge in your bass-player’s divorce court to decide who owns what percentage of the band equipment, your partnership agreement can set that out clearly in writing. Forming an LLC with an Operating Agreement that establishes what property belongs to the LLC rather than its members is another protective option.
The balance between control and risk management is always a delicate one. If you establish an LLC, and the LLC buys new high-end instruments with LLC funds and holds them as LLC property, you can rest easy that those instruments are well-protected from the financial and relationship foibles of your bandmates. However, if you decide to quit the band, those instruments are not going with you – they stay with the band LLC. The LLC may decide to give or sell them to you as a parting gift, but they also may decide to let whoever the next band member is use them.
In addition to creating a formal band entity to protect your gear, you might also consider the old adage that possession is nine-tenths of the law. Often one band member has a spare room, basement or studio where you store all the band equipment between practices, including personally-owned instruments and gear. That’s convenient, but also runs the risk of all that equipment either being destroyed at once in a flood or fire, or being lost to in the legal process if that band member winds up kicked out of their house in a divorce proceeding. Despite the fact that lugging equipment back and forth is a bear, ensuring that each band member maintains physical possession of their own gear and instruments helps spread the risk of loss around. And if one band member’s relationship or finances is on the rocks, be sure to keep careful control over your own personally-owned gear so it does not wind up thrown into the pile of assets being picked over by the divorce court or bankruptcy trustee.
