Legal Business Structures For Bands and Musical Ensembles – September, 2014
Music is our passion, why complicate it with legalities and company structures?
Emerging bands rarely consider legal and business issues associated with the band’s activities which may include, live performance, concerts, touring, recording, marketing, distribution and sale of their recorded music and associated merchandise. Most bands exist as an informal partnership arrangement, without any documented partnership agreement dealing with:
- Ownership of copyright in the music, lyrics and artwork created by the band members;
- Ownership of the band name, logos and trade marks used by the band;
- Ownership of domain names, website and social media sites associated with the band;
- Ownership of copyright in recordings and video clips;
- Ownership of equipment and other assets purchased by the band;
- Sharing or distribution of money made by the band from performances, recordings, merchandising and other activities;
- The ongoing funding of the band’s activities;
- Contributions from band members required for the funding of the band’s activities, such as the costs associated with the production, marketing, distribution and sale of recordings, videos and merchandise;
- The liability of band members where an expense, debt or other liability is incurred;
Liability of band members where a claim of unauthorised use or copyright infringement is made in respect of music performed or recorded by band members; - Liability of band members in contracting or entering into arrangements with third parties, including band managers, venues, production, record and distribution companies;
- Exit of an existing member of the band;
- A new member joining the band;
The informal arrangements between band members can expose members to both commercial and legal risks and liabilities, particularly, if a dispute occurs amongst band members as to respective contributions and/or entitlements, or if any third party claims are made against members.
Emerging and existing bands can benefit from obtaining strategic commercial legal and accounting advice on what legal structure is best suited for their band, whether that be a formal partnership or a company.
Stephens Lawyers & Consultants can provide strategic commercial legal advice to band members as to options for structuring bands including:
- partnership agreements for newly established bands;
- agreements recording existing informal arrangement between band members;
- agreements dealing with the ownership of intellectual property – including copyright in their lyrics, music, recordings, videos and other works; and
- Setting up a company and shareholder’s agreement.
Although, a company structure is rarely on the agenda for an emerging band or music ensemble, there are benefits in using this structure over a partnership arrangement. These are discussed below.
The Benefits of a Company structure for a band or musical ensemble.
Incorporating your band by utilising a company structure, even at an early stage, can be a smart way to protect your interests, maximise profit and minimise the risk of future disputes.
Under a private company structure or a company ‘limited by shares’:
1. Band members become shareholders in a company which is a legal entity registered with the corporate regulator, ASIC under the Corporations Act. The band members’ shareholding can reflect their involvement in the band and those with a lower level of input or commitment can have a lower shareholding or be allotted a different class of shares;
2. The company’s internal management is governed by provisions of the Corporations Act that apply to the company as replaceable rules, by the company’s constitution or a combination of both. The company’s constitution is a document which sets out the rules for the internal management of the company, which apply to the directors and shareholders of the company;
3. Band members can also enter into a shareholder’s agreement – a written agreement between the shareholders / band members which sets out each shareholder’s powers and responsibilities in relation to the management and operation of the business of the company, funding of the company’s operations, payment of dividends to shareholders from profits, sale of shares by existing members, issuing of new shares to existing members and new members and ownership of intellectual property created by shareholders / band members;
4. Any profits made by the company can be distributed to each of the band members by way of dividends according to their shareholding and the terms of any constitution and/or shareholders’ agreement; Band members can also be employees of the company and be paid a salary in addition to any dividend entitlements; In addition, the company can also be the employer of all staff required for the band’s activities – such as live sound engineers who mix the band’s sound at concerts, and those who sell the band’s recordings or merchandise.
5. One or more band members can be directors of the company. Directors manage and make decisions on behalf of the company in accordance with the company’s constitution and provisions of the Corporations Act;
6. The company conducts the business dealings of the band, including purchase and rental of equipment, agreements with band managers, booking agents and venues and contracts with production companies, record companies, publishers and distributors.
Benefits of incorporating your band or musical ensemble as a company include:
1. Limited Liability – Limited liability of the members or shareholders of the company is perhaps the greatest advantage of having a band operating in a company structure. Prior to incorporation most bands exist as informal partnerships. Each partner in an informal partnership can be held personally liable for the debts and liabilities incurred by the partnership. Creditors of partnerships will often pursue the partner with the most assets, leaving that partner to recover payment from the other partners.
When a band is incorporated as a company, members of the band become shareholders of the company and are issued shares at a set ‘issue price.’ From that point on each band member’s liability is limited to the value of his or her shares in the company.
While playing in a band is generally considered as a low risk venture, there are a number of situations in which the protection of a limited liability company can be advantageous, including:
A. Where the band is incurring a liability to a record company by virtue of an advance provided pursuant to a recording contract and the band members have not made adequate provisions to repay those advances where the recording does not generate sufficient sales to cover the advance.
The perils of entering major label contracts is well documented; frequently artists/musicians – even successful ones – ultimately end up indebted to record labels for their advances.
If you or your group are offered a contract with a major label – congratulations! – but make sure that you have the contract reviewed from a legal and commercial perspective before signing so that you understand what your potential liability is to the record company. This is also an opportune time to review the structure of your band and to incorporate, if you are still operating under an informal partnership structure.
B. If a band is considering seeking a bank loan to finance its projects, i.e. touring or recording; In the case of commercial lending, in assessing a loan application, banks will look at the structure of the band, its business and marketing plan, financials (including income and expenditure, asset and liability statements) and any existing and prospective contracts
C. If a band is going to be directly involved in the sale of its own CD’s, records, T-shirts and other merchandise at shows and on-line. Such commercial activities can potentially expose individual band members, who are not operating their band in a company, to potential personal liability when dealing with manufacturers and consumers in the event of:-
i. contractual disputes; or
ii. product liability issues in relation to the sale of the CD, recordings, T-shirts or other merchandise to fans.
D. Individual band members operating in an informal partnership will also be exposed to liability, if the band is going to host and promote its own concerts and employ people to staff them. Where a band operates as a company, all contracts associated with the hosting of the concert and employment of staff are with the company and not individual members.
E. Where bands are performing or recording works, which are not all original or are covers, adaptations, re-workings or versions of existing material, proper copyright clearances have to be obtained by the band and/or its members. In the case of unincorporated bands, individual band members can be personally liable for copyright infringement claims where third party copyright clearances have not been obtained or are not sufficient to cover the use being made of the work.
2. Defining Rights and Ownership of Assets – Generally the most valuable assets of a band are the copyright and other intellectual property rights associated with its music, performances, recordings and videos. Incorporating a band can reduce the risk of future disputes by clearly setting out each band members’ rights in the band’s intellectual property in these works and other assets. As a separate legal entity, a company can own any of the band’s intellectual property and other assets including:
A. Trade mark in the band name or logo, or any words or logos used on the band’s merchandise;
B. Copyright in the music, lyrics, recordings, video/video clips and artwork created by the band;
C. The domain name of the band’s website or associated sites;
D. Any equipment such as microphones, mixing desks and PA speakers.
If the above assets are owned by a company, individual band members do not retain any individual ownership rights in any copyright material that they create as band members, however each band member’s contribution is reflected in their shareholding in the company. The band’s property will remain with the company, reducing the likelihood of any disputes as to who owns the band name or retains rights to the songs, music, recordings and/or videos and the associated intellectual property and other assets.
Where the company’s assets increase in value – say for example if the band has a ‘hit’ song – the value of the company’s shares held by the band members will increase accordingly, and the band members as shareholders will also be entitled to dividends from profits made by the Company.
If a band member decides to leave the group, his/her shareholding in the company can be ‘bought out’ by the other members for an agreed value or for a value determined by an independent valuer. Whether a departing band member can retain his shareholding in the company and continue to receive dividends from profits made by the company upon leaving the band, is generally determined by the shareholder’s agreement.
3. Tax Advantages – Incorporation also brings a band under company tax rates, which can be more advantageous than those rates that apply to individuals and partnerships. In addition to legal advice, emerging band should seek advice from an accountant and/or tax advisor in respect of taxation issues.
A Company Structure will involve additional administrative requirements.
Although there are benefits in bands incorporating into a company, the company structure may not suit all situations. The company structure when compared with most informal band arrangements, will involve additional administration for compliance with the Corporations Act. For example, once the company is registered, to maintain the registration, an annual fee is payable to the company regulator, ASIC.
Directors of a company have specific obligations under the company’s constitution and also under the Corporations Act. These include:
1. The duty to avoid conflict of interest between the interests of the company and a director’s personal interests and to disclose such conflict where it arises . This duty also exists at common law in a partnership arrangement between band members; i.e. band members must act in the interest of the band and not put themselves in a position where their personal interests conflict with the interests of the band.
2. The duty not to misuse corporate information acquired by virtue of being a company director .
3. The duty not to incur debts at a time where there are reasonable grounds to expect that the company will not be able to pay all its debts as and when they become due. If a director of a company incurs a debt on behalf of the company, when he/she knows that it is insolvent, the director can be held to be personally liable for that debt .
4. Company directors must also notify the company regulator, ASIC, of any changes to the company details.
Authored by Harrison Ottaway and Katarina Klaric
Stephens Lawyers & Consultants.
Harrison Ottaway is a lawyer with Stephens Lawyers & Consultants with music industry expertise and is also a band member of The Corsairs (https://www.triplejunearthed.com/artist/corsairs-0 )
Katarina Klaric is a Principal of Stephens Lawyers & Consultants.
Stephens Lawyers and Consultants can advise on whether incorporation is the right solution for you and assist in the incorporation of your band.
Footnotes
1. Corporations Act 2001, Sec. 134.
2. See, for example, ‘The Problem with Music’ Albini, Steve, Maximum Rock n’ Roll Volume 133, June 1994
3. Corporations Act 2001, Sec.191
4. Corporations Act 2001. Sec 183
5. Corporations Act 2001. Sec 588G
6. Harrison Ottaway is a lawyer with Stephens Lawyers & Consultants and also a band member of The Corsairs (https://www.triplejunearthed.com/artist/corsairs-0)
7. Katarina Klaric is a Principal of Stephens Lawyers & Consultants.
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