If you own and operate a record label, you’ve probably at least considered forming a limited liability company (LLC) for your business. The LLC is a popular option for all sorts of businesses looking for asset protection, and it has a handful of other major advantages as well.
Of course, forming an LLC isn’t the only option for your record label, so our mission is to help you decide if it’s the best choice for you. There are many different factors to consider when you’re forming a business entity for your recording company, so let’s dive into the details of the LLC to figure out if you should form one.
If you need help starting an LLC or just want to make sure it’s done correctly, hire an online LLC service like ZenBusiness ($39) or LegalZoom ($99). They take care of all the legal paperwork so you can focus on what you do best.
Tip: ZenBusiness is the best deal and scored higher than any other LLC service.
What Is an LLC?
First off, let’s quickly outline what an LLC is. LLCs are formal legal entities that are typically taxed similarly to sole proprietorships and general partnerships, in that the owners include any company profits or losses into their personal returns — the LLC itself does not owe income taxes. An LLC may also elect to be taxed like a corporation, although this is not a very common option.
There are similarities to corporations too, especially when it comes to financial responsibilities. In an LLC, the owners or members are not usually personally accountable for the financial status of the business. This means that if someone sues your LLC, your personal assets are not at risk.
Why Starting an LLC for a Record Label Is Important
The top reason to form an LLC for a record label is to gain access to the personal asset protection provided by this business structure. Whether you operate your business as a small independent label or a large recording company with an array of clients, you need the limited liability protections that an LLC can provide.
As an example, let’s say that you record a musician performing a cover song. You later find out that neither you nor the artist has the rights to record the song, and the original writer sues you. If you operate your record label as a sole proprietorship or general partnership, your personal assets — like your house, car, personal bank accounts, etc. — would be at risk if that individual decides to sue your business.
On the other hand, if you form an LLC for your record label, and you operate and maintain that LLC in a compliant fashion, the scope of that musician’s lawsuit will be limited to your business assets. In other words, your personal assets will be protected by the business structure you’ve chosen.
However, this is just the tip of the iceberg when it comes to the advantages of the LLC for a record label. Another important aspect is taxation. The LLC actually provides its owners with a selection of options regarding how they want the business to be taxed, which can save you a considerable amount of money compared to simply operating as an informal business entity.
Your record label LLC can be taxed as a sole proprietorship (for single-member LLCs) or general partnership (for multi-member LLCs), which is the default option. With this tax structure, your label itself does not pay taxes, but rather the profits are passed through the business entity and your owners pay taxes on that money when they file their own personal taxes.
You can also choose for your record label to be taxed as a C corporation, although this option isn’t very popular because it subjects your business to what’s known as double taxation — meaning that your profits are taxed first on the corporate level and again on the personal level when they’re distributed to your owners.
The other option is S corporation taxation. There are quite a few limitations to electing S corp taxation, but most U.S.-based record labels have no trouble meeting these requirements — your business cannot have more than 100 owners, they all must be either residents or citizens of the United States, etc.
S corp taxation can help your record label save money by reducing your self-employment tax burden. Instead of paying self-employment taxes (a 15.3% tax that includes the employer and employee portions of Medicare and Social Security) on all of your business income, you can pay yourself and your co-owners a reasonable salary for your roles and only pay self-employment tax on that portion of your income, while you can reinvest the rest of it into your business without paying this tax.
Compared to operating a sole proprietorship or general partnership record label, the S corp taxation model can save you quite a bit of cash that you can use to buy upgraded recording equipment or make other improvements to your recording studio, rather than writing a big check to Uncle Sam.
Finally, an LLC structure can enhance the credibility of your record label business venture. Informal business entities don’t have exclusive assumed business names and typically operate under the personal name(s) of their owner(s). For instance, if your name is Johnny Smith and you operate a record label, your company’s name is also “Johnny Smith,” which obviously isn’t a great name for a business of any kind.
In this scenario, you could register a DBA (doing business as) name to give your business the ability to operate under an assumed business name, but DBAs have no exclusivity regarding their naming rights. This means that if another label wants to use your DBA name as their own, they’re not only allowed to do so, but they can actually register a formal business entity with that name, preventing you from continuing to use your own assumed name.
With an LLC, you not only have the rights to exclusive use of a business name, but you will also have either the phrase “limited liability company” or the letters “LLC” in that business name. This provides your business with a jolt of respectability because customers respect the professionalism displayed by an LLC. Also, they typically feel more comfortable writing checks to a business entity rather than to an individual.
How to Start a Record Label LLC
The formation process for LLCs varies depending on which state you’re forming one in, but in general, the process has some universal steps that need to be taken no matter what state your business is located in. If you want a comprehensive overview of all the steps required to form an LLC, check out our complete guide on the topic. The basic steps in the LLC formation process in any state are as follows:
The 3 Best LLC Websites
When forming an LLC for your business, you generally have three main options. You can form your own LLC using the DIY method, you can hire an attorney, or you can hire an online business formation service.
The DIY route can require quite a bit of effort, and if you’re not comfortable with the process, it can cause some undue stress. As for hiring a lawyer, many startups can’t afford to spend the thousands of dollars it can cost for an attorney to form your business entity.
This leads us to the third option, hiring an online LLC service. There are dozens of reputable companies offering this service these days, and they can all save you a tremendous amount of money compared to an attorney. In addition, while these companies may not have as much expertise as an attorney does, they still provide a considerable amount of peace of mind compared to the DIY route.
If you want to take a look at the top options for online business formation services, head on over to our guide to the seven top LLC websites available. In addition, we’ll briefly break down our top three options on this page. These are, in our opinion, the best options for business formation service:
🥇 ZenBusiness – Best Overall Value
ZenBusiness truly has it all. They provide complete LLC formation service along with a full year of registered agent service for one incredibly low rate, and they also have stellar customer feedback. It’s the best LLC service online.
IncFile – Cheapest LLC Service
IncFile has a business formation package that is free of charge, as long as you pay your own state fee. That’s obviously an enticing offer, especially when you consider that they also provide a year of registered agent. Throw in their strong customer feedback, and IncFile is an excellent choice for LLC formations.
Northwest – Premium Support
Northwest is a bit more expensive, but their industry-best registered agent service includes local scanning of every document they receive on your behalf. They also have the best customer support for LLC services. If you’re looking for a premium service, Northwest is excellent.
Additional Resources for Starting a Record Label
- Audio Issues: Audio Issues is an excellent resource for anyone who makes a living recording music, or even if you just produce recordings for fun. With Audio Issues, you can “learn simple and practical audio production tips you can use right away to improve your music.” They have a ton of great tools available, like their “26 Home Recording Studio Resources” article that’s stuffed with good info.
- Sound and Music: Sound and Music is “The national charity for new music” in the United Kingdom, and they back up this catchphrase with plenty of substance. Even though they’re based in the UK, there’s still tons of information on this site that any recording professional can take advantage of. Just take a look at their “Education” and “Resources” tabs to find out for yourself!
- Growthink’s How to Start a Record Label: This resource is a comprehensive guide to starting a record label, and the information you’ll find here is applicable to labels both big and small. This guide spans 16 chapters, from getting started to business models and startup costs. We recommend reading it before you ever open your record label for business.
- SonicScoop: SonicScoop opened for business in 2009, and since then they’ve been an advocate for the music and audio production industry. They maintain a large collection of news articles, and they also have a podcast, tips and tutorials, gear and equipment reviews, video lessons, online studio tours, and more. SonicScoop is a great resource for any type of record label or recording studio.
- SoundExchange: Do you want your label’s music played on streaming services, like satellite and/or internet radio, TV music channels, and more? SoundExchange is a nonprofit that helps record labels and artists collect performance royalties from digital platforms. In fact, they’re the only organization in the U.S. that’s appointed by the Library of Congress to handle this important issue.