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How To Start Your Own Business (And Whether Artists Should)

May 9, 2018 | Written by: Stem

Running a business requires time and energy. When done right, a corporate entity should operate like a music startup. It can keep artists in the green and out of trouble. Conversely, businesses can also create new problems when treated without care.

You don’t need millions in cash to get the ball rolling. Rules and costs vary across state lines, but a few hundred dollars will usually cover the price tag of filing for a legally recognized company. For a majority of rising artists, a limited liability company (or LLC) will make the most sense, as opposed to a partnership or corporation. (LLCs offer legal protection partnerships don’t. They also need less maintenance than full-fledged corps. S Corps, a midpoint between LLCs and regular corps, offer potential savings for artists making substantial money each year. Click here to see if S Corps make sense for you.) Before committing, though, it’s important to self-examine. Do you think you’ll make enough to cover fees? Will you tolerate the nuisance known as accounting?

Granted, some situations demand an act-now-apologize-later approach. Airbnb’s co-founders initially subsisted on a revolving door of maxed credit cards. Even then, winging it will only get you so far. Stem, in itself the result of proper formation, hopes to help you determine whether you should do the same.

Why start a music startup?

Protection

LLCs and corporations exist, in part, to shield individuals from legal action enacted against them. Artists risk personal liability when they operate unprotected. Fictitious examples incoming!

Meet Winsie Woo, recording artist. She drives to the studio every morning to craft classics. This is a business-related activity she regularly conducts without the safe harbor of a separate business. One day, on her commute, she scrapes someone’s elbow with her vehicle. That person presses charges against Woo for $3 million. In a victory over common sense, the plaintiff wins. Winsie doesn’t have that kind of money, but she does possess assets—physical property (her home and car) and intellectual property (her music). The court orders her to liquidate assets (e.g. sell her home) to pay the plaintiff’s damages.

Pretty insane, right? A different outcome might have occurred if Winsie had filed for Wow That Song’s Tight, LLC before the accident—better yet, at the start of her career. In that version of events, her personal assets (her home) wouldn’t be up for grabs, only the business’ assets. To be clear, LLCs and S Corps exist to protect its owner (or ‘member’), less so the firm’s assets. If your company is listed as the owner of your copyrights, those assets are not safe in litigation.

Motivation

Have you ever ordered too much food and finished the plate anyway, just because you paid for it? The power of self-investment isn’t far removed. It’s not free to form a business, and lifting it off the ground takes devotion. To even try reflects ambition and the sort of self-belief that ‘making it’ so often requires. Plus, those same startup costs can serve as initial goals.

Say you’re a California artist looking to register your first limited liability company. It will cost $800 per year in that state—substantially more expensive than most, fyi—to maintain good standing status. So, for the first year, setting the minimum earnings benchmark to $800 provides a concrete destination to shoot for.

Legitimacy

Perception governs reality for just about every human on the planet. That includes writers, managers, programmers and agents. If someone sees “LLC” or “Inc” in your email signature, or receives a note from a custom address ([email protected]), that person might just hold your words (and the audio files attached) in higher regard. An associated company signals professionalism. It implies attention to detail and dedication.

That said, your company’s existence doesn’t promise an opening tour slot or even a response to your cold email. Think of it as a cherry on top, both within and beyond the industry. Attentive fans will notice your company name at the start or conclusion of videos. Core fans will likely buy products with your company name printed across if it’s eye-catching enough. Brockhampton’s Question Everything, Inc. constitutes a brand in itself. OVO would elicit top-of-mind recognition around the world.

Taxes

How they work 

As the adage goes, life guarantees two things: death and taxes. The Internal Revenue Service exists to keep us honest and keep the country’s public projects funded. After the IRS takes a portion of the money U.S. citizens earn each year, our government (local, state and federal) uses that money to support the common good (in theory). Most roads, bridges and military endeavors would not exist without taxes. Many social services, like Medicaid, would not exist without taxes.

If you make enough money in a calendar year to warrant filing (e.g. minimum earnings of $10,400 if you’re unmarried and under 65), you usually file by April 15 of the following year. So, if I’m single, younger than 65 and make $11,000 in 2018, I’ll have to file tax returns by mid-April of 2019. Millions of people file a report to the IRS that essentially says the following:

Why deductions matter 

Deductions matter because they decrease your net income, therefore lowering taxes owed. Say a song grossed you $100,000 in 2017. If you don’t list any deductions on your tax returns, you’ll pay a tax of $28,000 to reflect your 28-percent bracket. However, if you deducted the $20,000 producer fee paid to make that song, your taxable income drops to $80,000, good for the 25-percent bracket. Now, instead of paying $28,000 to the IRS, you’d pay $20,000. #Savings.

Most taxpayers can claim deductions on their personal returns, but having a company helps clearly distinguish between personal and business expenses. For example, dinner with mom isn’t deductible, but dinner with your manager is. Resultantly, having a business with a separate bank account should make it much easier to file returns each year. It can also make it easier to defend your filings if the IRS requests an audit.

How do I do any of this?

Excellent question. If you’ve made it this far and still want to consider starting your own business, here’s what we recommend.

Homework

Purpose

Profits & Losses

Company Basics

Trademark

Filing

Future

Operating Agreement

Business Bank Account 

Invoices

Taxes

Don’t Stop Here

We highly encourage readers to consider this article a stepping stone toward additional research. Stem is happy to solicit foundational knowledge, but trained professionals know best. The peace of mind that can come from walk-in tax consultations at H&R Block (they’re not scary!) or semiannual accounting check-ups with a CPA warrant the upfront cost.

However monotonous, proper business administration and government compliance build invaluable habits that transcend the (mildly unexciting) tasks required. This is not legal advice, simply a high-level roadmap to help make your music startup official.

music startup