As suggested in Oath Of The Indie Musician – Part 1: Declaration, establishing yourself (and/or band) as a business entity is a mandatory step in pursuing a career as an indie musician.
One of the most important decisions when setting up your band or yourself as a business entity is the type of legal structure you select for your company. This choice will have a direct impact on how much you pay in taxes, the amount of paperwork your business is required to do, the personal liability you face, and your ability to borrow money.
Common Types of Business Entities
There are three primary factors on which to base your choice – liability, taxation, and record-keeping. Let’s look at the differences between the most common business structures:
- Sole Proprietorship – This is the most common form of business organization, as well as the easiest to form. The owner maintains complete managerial control, but is also personally liable for all financial obligations of the business.
- Partnership – This involves two or more people who agree to share in the profits or losses of a business. Those profits or losses are “passed through” to partners to report on their individual income tax returns. The main disadvantage of a Partnership is liability, as each partner is personally liable for the financial obligations of the business.
- Corporation – This is a legal entity that is created to conduct business, becoming a separate entity from those who founded it and handle the responsibilities of the organization. A Corporation can be taxed and can be held legally liable for its actions just as if it were a person. Unlike a Sole Proprietorship or Partnership, corporate status shields owners from personal liability. A drawback to this business structure might be the cost to form a Corporation, as well as the extensive record-keeping required to run it. Double Taxation is often cited as a drawback, but the S Corporation (or Subchapter Corporation), a variation of the regular C Corporation, avoids this by allowing profits or losses to be passed through on individual tax returns, similar to a partnership.
- Limited Liability Company (LLC) – This is a hybrid form of Partnership that allows owners to take advantage of the benefits of both a Corporation and a Partnership. One of the most popular features of this business structure is that profits and losses can be passed through to owners without taxation of the business itself while owners are shielded from personal liability.
Also mentioned in The Oath – for more information on forming your business, consider checking with your local Small Business Administration (SBA), as well as your city hall, county clerk, or county tax assessor. The IRS also provides business start up information, including a collection of links to each State Agency.
Wicked D Harrison
Author of TAKE THE OATH: A Practical Pocket Guide For The Career Indie Musician. Co-founder with Rebecca Firstenfeld at neoDev Solutions, providing solutions for artists, entrepreneurs, and small business.
