Why should I form a corporation or LLC?
This answer is another of my Scene Magazine Columns, discussing the issue in the context of a band, but the principles are the same - you want to create a liability shield for your personal assets, and to project a more professional image.

It's been said that people buy from people, and businesses buy from businesses. That applies.

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You’ve been writing some songs. You and a few friends can play. You get a gig. It’s going to pay a few hundred bucks and maybe some beers. Hey, you’re getting paid to play and party. What could go wrong?

Plenty. You’ve just formed a business – a “general partnership” to be exact. “Big deal” you say, “no worries, we’ll just split the cash and maybe report some of it on our taxes.” Of course you will. As a lawyer, that’s not my worry. My worry is what happens with your buddy Tommy drives home from the gig (maybe with a couple too many beers in him) and gets in a car accident that hurts someone.

Yup, Tommy is in big trouble. The thing is, so are you. As a “general partner” in your band, you’re liable for all the activity of the partners (or agents, or employees) while engaged in the business of the partnership. In this case, driving home from the gig would be considered being engaged in the business of the partnership.

Tommy’s accident just put your house, car, amp, guitar, drums, IRA, and everything else you own on the line. You could lose everything for the split of the $500 that came in at the door for that one gig.

So, what do you do about it? First, don’t let your band mates drive after drinking – always have a designated driver. Avoid the risk. Second, form an LLC. It only costs $25 to form an LLC in Colorado. Just go to www.sos.state.co.us, log into the business center and fill out the online form. Easy. (If you have any questions, email or call me!)

The LLC will limit liability (that’s why it’s called a “Limited Liability Company” in the first place) to the assets that are actually IN the company. If it’s YOU that has the car accident, or gets in a fight, or does something else that’s generally considered stupid and exposes you and the group to a lawsuit, your house is still on the line. But, if it’s Tommy that screws up, HE might lose everything, but you only lose the assets you’ve put into the company.

Of course, now you have a “legitimate” business. That business has to keep financial records and file an “informational” tax return. So, after you finish filling out the paperwork on the Secreatary of State Web site, you need to apply for an Employee Identification Number (EIN) – basically a social security number for your new company. You get this by filling out IRS form SS-4, which you can get right from the home page of www.irs.gov. Check the box as a partnership and have your company end its fiscal year in December. You can even complete this task over the phone.

Take your organization number (from the Secretary of State) and your EIN (from the IRS) to the bank and start a checking account. Start running all the income and expenses through that checking account. At the end of the year, you file a tax return for the business that informs the IRS how much each “member” (owner) of the band needs to report on their individual tax return. The IRS computers watch for these numbers to match up – if they don’t you’ll be at much higher risk of an audit.

You’ll want to discuss who can write checks with the rest of the band. It’s a good idea to say that any check for more than $500 or so requires two signatures. If the band is generating some real income, or, if one or more members tends to do more work, then you should really talk with an attorney and create an “Operating Agreement” that lets everyone know and documents the way money gets split. If you are writing new material, then you need to figure out the copyright ownership issues (subject of a later column) sort out. The operating agreement should also lay out how someone leaves or joins the band, what is expected of the owners, and your general intentions relative to working together or solo.

Music is a business, granted, it can be more fun than accounting, but it’s still a business and needs to be treated as such. It doesn’t take a lot of time or money to shield yourself from the real potential liabilities that come with any business. Do yourself a favor and invest a little effort to make sure your band remains a fun, rewarding activity and not something you’ll regret while watching all of your assets disappear because your buddy screwed up.