Checklist of questions for a band forming a partnership or LLC

 
 

QUESTIONS FOR MUSICAL GROUP

WANTING TO FORM A PARTNERSHIP OR LIMITED LIABILITY COMPANY

The following is a basic outline of the issues a band should consider regarding the terms that would govern its partnership or limited liability company (“LLC”). In the parlance of LLCs, an owner of a LLC is referred to as a “member,” rather than a “partner.”

1.Partnership vs. LLC:

(a)Most bands no longer use corporations to conduct business, because partnerships and LLCs are much more flexible in allocating income among the band members. In a corporation, dividends paid to the band members from all sources need to be paid in proportion to a band member’s ownership interest in the corporation, and all or almost all of the cash in the corporation needs to be distributed out of the corporation at year end in order to avoid double taxation. (In other words, the band would want to avoid having the corporation pay taxes on certain monies kept in the corporation with the members having to pay taxes on that money when it is distributed to the members).

(b)A LLC has the advantages over a partnership, because the members are not personally liable for the acts or omissions of another partner.

(c)A tax advisor should be consulted before the band decides to be a partnership, an LLC, a corporation or a subchapter S corporation.

(d)For purposes of the balance of this memorandum, I will use the term “LLC” even though the band may pick another structure.

2.Ownership; Sharing in Profits:

(a)Typically, a band LLC is usually equally owned by all of the members of the band, but this does not have to be the case. For example, newer members may be given a smaller ownership interest. Also, not all of the people who perform with the band will necessarily have an ownership interest in the LLC. For example, one or more people playing in the band could merely be an employee or an independent contractor, perhaps, for some period of time prior to receiving an ownership interest.

(b)For the most part, the members usually share in the profits of the LLC in proportion to each member’s ownership interest in the LLC. However, this does not need to be the case. Unlike in a corporation where each shareholder basically receives its proportionate share of all income, regardless of the source of such income, members of an LLC may receive different shares of income from different sources. As discussed in paragraph 6(a) below, this usually happens with respect to publishing income.

3.Scope of the LLC:

(a)Typically, all of the band’s activities are run through the LLC. These would include recording records, performing live, publishing, merchandising, corporate sponsorships, performing for videos, concert videos, motion pictures, television and other audiovisual works, promotion, and publicity. However, in order to protect non-touring income from claims that may arise from touring, touring is usually run through a separate entity, and music publishing becomes somewhat more complicated when the members are writing songs outside of the band. These publishing issues are addressed in detail in paragraph 6 below.

(b)The LLC would become the contracting party for all agreements entered into by the band, collect all monies payable to the band, and pay all of the band’s bills. To the extent the band has already entered into agreements, those agreements should be assigned by the band to the LLC.

(c)(i)There is one issue for which there is no easy answer. The question is whether a work of authorship (e.g., a song or a recording) should be deemed a work for hire in the band agreement or whether it should owned by the individual members and assigned by them to the LLC. An assignment of a copyright that is not a work for hire may be terminated in the USA 35 years after the assignment. On the other hand, a copyright that is a work made for hire may be assigned in perpetuity.

(ii)Therefore, if band agreement states that a work is a work made for hire, then neither the individual members nor their heirs can terminate that assignment. This is good for the band that sticks together for over 35 years and keeps the copyrights. The problem, however, arises if the band assigns its copyright to a third party (e.g., a third party music publisher). The band members may want to terminate that copyright 35 years after the assignment; however, if the band agreement states that the copyright is a work made for hire, then it is highly likely that the assignment cannot be terminated.

4.Name:

(a)Usually, the name of the LLC would be the same as the name of the band. However, this does not need to be the case. Like any business entity, the LLC may adopt additional fictitious business names. For example, the band’s publishing company will typically have a different name than the name of the LLC.

(b)The name(s) used by the LLC and/or the band is typically owned by the LLC, rather than the individual members. However, the name(s) could be owned by one or more of the individual members and licensed to the LLC.

(c)An issue that needs to be addressed is who owns the name of the band if certain members leave the band. In some cases, a particular member is so important to the band that it makes the most sense for him to take the name if he leaves the band. Also, another issue is who owns the name if the band disbands. The band agreement may provide that the name of the band may only be used thereafter if certain individuals reform the band or only if a majority of the people who were members when the band was disbanded reform the band.

5.Management:

(a)Band decisions can be made by a majority vote, a unanimous vote or by any variation thereof. For example, in order for there to a “majority,” one or more specific individuals may have to be voting in the “majority.” In other words, all of the members may not have equal voting rights. Band decisions may also be made by one or more of the members selected to be the “managing members.” Typically, some decisions are subject to a majority vote and some decisions require a unanimous vote. In order to avoid most deadlocks, a band would typically want to limit the number of issues that are subject to a unanimous vote.

(b)The following are typical examples of those issues that may require a unanimous vote:

(i)Expelling a Member from the LLC (of course, the member being expelled would not vote on this);

(ii)Admitting a new member; and

(iii)Amending the operating agreement, which governs the relationship of the members.

(c)The following are other types of decisions that typically would be made by the managing members, or, if none, a majority vote, but could be made subject to a unanimous vote.

(i)general business decisions (such as how to invest LLC monies, how much to draw as salaries, the designation of any managing members, the band’s business manager, attorney, auditors, manager, and when and how to tour); and

(ii)creative decisions (such as what songs to record and/or put on an album, what producer to use, album artwork, merchandising, what songs to play on tour).

6.Terminated Members: As used herein, the term “Terminated Member” refers to a member who leaves the band, whether due to his expulsion, his decision to leave, or his death or disability.

(a)Expelled Member: A difficult issue is how a member may be expelled from the band. Because this decision is so important, most bands require a unanimous vote (excluding the member being expelled) in order to expel a member. (In some cases, a band will want the operating agreement to provide for a warning notice to put the member on notice that he is going to be expelled if he doesn’t do or stop doing certain things. This warning notice may involve a probationary period during which monies are withheld to the member. I would recommend not including a warning notice in the operating agreement. Most likely, when it gets to the point where all the other members want to expel a member, the band would not have gone through the formality of sending the warning notice.)

(b)Leaving Member: Notwithstanding a written agreement to the contrary, it is difficult, if not futile, to try to force a member to continue to perform with the band if he no longer wants to. Therefore, each member should be free to leave the band. However, the operating agreement should provide that the leaving member will be responsible for any liabilities or expenses the band incurs as a result of his departure. For example, if a member leaves the band immediately prior to the band’s scheduled tour, the leaving member should, perhaps, be responsible for the out-of-pocket costs incurred by the band if the tour has to be cancelled and for claims against the band caused by the cancellation, but not for the “profits” the band lost by canceling the tour.

(c)Continuing Payments to a Terminated Member (or his estate in the case of a deceased member):

(i)Typically, a Terminated Member would continue to share in all income attributable to activities of the band while he was a member. For example, a Terminated Member would continue to get his share of record royalties from tracks recorded while he was a member and publishing income from songs recorded while he was a member. The income to the Terminated Member would be subject to all management commissions, legal fees and other expenses of the band applicable to that income, and may also be subject to an administration fee to be retained by the LLC (e.g., 10%).

(ii)The band, however, may want to make an exception if the Terminated Member did not tour in support of a particular album. For example, if a member quits the band after an album is recorded and the remaining members subsequently tour in support of the album, the remaining members may not want to give the leaving member his full share of the royalties from that album (especially, if the remaining members then have to hire a replacement for the leaving member). The operating agreement may therefore provide that in this situation, the leaving member would only be paid one-half (or some other fraction) of the royalties that he would otherwise receive for that album and that he would not share in any royalty escalations that occur after the date the leaving member leaves the band.

(iii)The band may want to treat a member who leaves or is expelled from the band due to his disability (through no fault of his own) more favorably than a leaving or other expelled member.

(d)Buy-Out Provisions: In almost all cases, the LLC would have at least the option, if not the obligation, to buy-out a Terminated Member’s interest in the LLC. Typically, the parties would negotiate a buy-out price for all of the tangible assets, if any, owned by the band (e.g., equipment, cases, etc.). If the parties are unable to negotiate a price, the operating agreement would provide for an independent appraisal.

(e)The LLC would usually continue after the death, expulsion or withdrawal of a member. However, you may want to provide that the LLC would not continue unless a certain minimum number of members remain, such as at least three members in the case of a six member band.

7.Publishing: Songwriting and music publishing raises a host of unique issues.

(a)Publishing income is made up of two parts, songwriters’ royalties and the publisher’s share, which are generally equal amounts. In some bands, all publishing income goes only to the actual writers of the songs, in other bands, a portion of the publisher’s share of income goes to the non-writers, and in still other bands, a portion of the songwriters’ royalties as well as the publisher’s share goes to the non-writer.

(b)Administration & Ownership:

(i)Typically, the copyrights in songs are administered by the LLC; however, as set forth above, the copyrights may be actually owned by individual members or by the LLC. (Note that if band enters into a publishing or songwriter’s agreement with a third party music publisher, the administration rights are almost always assigned to the publisher.)

(ii)More problematically, what happens to the administration rights and ownership in the songs if the band breaks up? A simple solution would be for the last members of the band to continue to own and administer the songs by a majority vote. However, what happens if a member dies? Further, whose estate should have the administration and ownership of the songs if all of the members die?

(c)Should the band have the first opportunity to record a song? In other words, if one of the members writes a song, does he have to give the band the first opportunity to record the song before he can present the song to another recording artist or keep it for a solo album?

8.Like all legal documents in the music industry, I strongly recommend that the agreement be reviewed by a music attorney before it is signed. However, the band can save itself a substantial amount of money if it addresses the above issues before consulting with an attorney.