The Band Business Foundation
The time has arrived to look at legal concepts that are close to home. We now understand that when boiled down to its basics, we are creating copyrights that we are going to sell. These copyrights may be fortunate enough to have considerable cash value at some time in the future. We now need to address how we are going to split up that cash when it comes through the door.
Sharing Percentages among Partners
The first thing is to define what is being shared by whom and in what percentages. Here’s an excerpt from the more comprehensive General Partnership Agreement on the CD.
Profits and Losses
Until modified by mutual consent of all the Partners, the profits and losses of the Partnership and all items of income, gain, loss, deduction, or credit shall be shared by the Partners in the following proportions:
Partner Share in Profit and Loss
- Jim Halbertson 25%
- Bob Dobbs 25%
- Jack Benimble 25%
- Sam Jackson 25%
The above is a pretty simple statement but there could be other considerations. Take a look at the variety of partnerships, LLCs and other contracts on the CD. The waters of corporate legal matters can get very murky very quickly and it is advisable to have competent counsel review any deals you’re considering.
Let’s take a look at a chart of how a band might view their relationship before entering into a general partnership or other legal entity. You will need to inventory the band’s assets – both tangible and possible to come to the sharing percentage of each band member.
Band Member Sharing Percentages Worksheet
Band Name: The Today Tones
Jim Halbertson Guitar, Vocals, Writer, Producer
Robert Dobbs Drums,Vocals
Jack Benimble Vocals, Guitar
Sam Jackson Bass, Vocals
Asset Sharing Percentage
Band Member Sharing Percentages Worksheet
|Band Name:||The Today Tones|
|Jim Halbertson||Guitar, Vocals, Writer, Producer|
|Robert Dobbs||Drums, Vocals|
|Jack Benimble||Vocals, Guitar|
|Sam Jackson||Bass, Vocals|
|Name of Band, Logo and Service Mark||Shared equally by all band members.|
|Right to be a Contract Signatory||Shared equally by all members with Jim acting as band spokesman and signatory. A majority of band members must approve all deals involving over $250.|
|Rights to Writer Royalties||The writers of the songs retain all songwriting credits and copyrights. Non-writer members do not share in this income.|
|Rights to Sound Recordings||Shared equally by all band members.|
|Rights to Accounting||A bookkeeper or accountant will be elected by a majority of the band to handle the group’s accounting. All members have access to these records and books.|
|Rights to Performance Income||Shared equally by all band members.|
|Rights to Merchandising Income||Shared equally by all band members.|
|Rights to Outside Income (endorsements)||Share equally by all band members except in the case of a product being endorsed by a member as an individual. The band will not share in a member’s individual third party income.|
|Physical & Hard Assets of the Band||The ownership of all equipment paid for by the band is to be shared equally by all band members. Items that are owned and paid for by individual members are the property of that member.|
|Right to Expel a Member||A band member can be expelled by the majority vote of the other members. The member to be expelled has no vote.|
|Rights of an Exiting Member||Expelled members or those that leave the band of their own volition shall share in that portion of the assets that were acquired while a member. The physical assets of the group acquired during this period shall be assigned a fair market value and the exiting member shall be paid their share. In the case of ongoing merchandise or sales of recordings, the exiting band member shall retain their share, if any, that they had as a member until such physical inventory is reduced to zero.|
|Rights to Add a New Member or Guest||A band member may be hired only upon the unanimous agreement of the band. A support musician may be hired on a temporary basis and work-for-hire basis by the majority agreement of the band members.|
|Rights of a New Band Member||A new member shall receive a full member share of performance income but shall share in one-half share of any other income produced by the band for a period of one year. After one year, the member shall be viewed as fully vested in the band and share/receive a full band member share from that time forward.|
|In the Event of a Vote Tie||In the event of a tie vote that requires a majority of the band, the band member previously selected to be the band spokesman shall have the tie-breaking vote. In the event that the issue being voted on is about the band spokesman, lots shall be drawn between the other members to decide who has the tie-breaking vote.|
|Disbanding||If the group completely disbands and ceases business permanently, all assets held by the band shall be liquidated at fair market value and the proceeds shall be distributed to band members in accordance with their sharing percentages.|
In a few paragraphs, and filling out one form we can arrive at the basis for a simple partnership among band members. It is very simple and doesn’t cover all of the complexities of the industry, but it will put a firm foundation under a good regional cover band that is pulling in some regular money. For bands performing original music and basing their income and success on the sale and performance of original music, things get much stickier and we will visit that scenario in a moment. For now let’s look at a plain vanilla partnership agreement. It covers all the basics necessary to get the ball rolling and gives all the parties involved their legal due and piece of the action.
General Partnership Agreement
This Partnership Agreement (“Agreement”) made and effective this [Date], by and between the following individuals, referred to in this Agreement as the “Partners”:
The Partners wish to set forth, in a written agreement, the terms and conditions by which they will associate themselves in the Partnership.
Now, Therefore, in consideration of the promises contained in this Agreement, the Partners affirm in writing their association as a partnership in accordance with the following provisions:
1. Name and Place of Business. The name of the partnership shall be called Acme Music Management Co. (the “Partnership”). Its principal place of business shall be:
1234 S. Main St.
Somewhereville, CA 98765
until changed by agreement of the Partners, but the Partnership may own property and transact business in any and all other places as may from time to time be agreed upon by the Partners.
2. Purpose. The purpose of the Partnership shall be to ___Business Description___. The Partnership may also engage in any and every other kind or type of business, whether or not pertaining to the foregoing, upon which the Partners may at any time or from time to time agree.
3. Term. The Partnership shall commence as of the date of this Agreement and shall continue until terminated as provided herein.
4. Capital Accounts.
The Partners shall make an initial investment of capital, contemporaneously with the execution of this Agreement, as follows:
Jim Halbertson $50,000
Robert Dobbs $20,000
Jack Benimble $15,000
Sam Jackson $15,000
In addition to each Partner’s share of the profits and losses of the Partnership, as set forth in Section 5, each Partner is entitled to an interest in the assets of the Partnership.
The amount credited to the capital account of the Partners at any time shall be such amount as set forth in this Section 4 above, plus the Partner’s share of the net profits of the Partnership and any additional capital contributions made by the Partner and minus the Partner’s share of the losses of the Partnership and any distributions to or withdrawals made by the Partner. For all purposes of this Agreement, the Partnership net profits and each Partner’s capital account shall be computed in accordance with generally accepted accounting principles, consistently applied, and each Partner’s capital account, as reflected on the Partnership federal income tax return as of the end of any year, shall be deemed conclusively correct for all purposes, unless an objection in writing is made by any Partner and delivered to the accountant or accounting firm preparing the income tax return within one (1) year after the same has been filed with the Internal Revenue Service. If an objection is so filed, the validity of the objection shall be conclusively determined by an independent certified public accountant or accounting firm mutually acceptable to the Partners.
5. Profits and Losses. Until modified by mutual consent of all the Partners, the profits and losses of the Partnership and all items of income, gain, loss, deduction, or credit shall be shared by the Partners in the following proportions:
Partner Share in Profit and Loss
Jim Halbertson 50%
Robert Dobbs 20%
Jack Benimble 15%
Sam Jackson 15%
6. Books and Records of Account. The Partnership books and records shall be maintained at the principal office of the Partnership and each Partner shall have access to the books and records at all reasonable times.
7. Future Projects. The Partners recognize that future projects for the Partnership depend upon many factors beyond present control, but the Partners wish to set forth in writing and to mutually acknowledge their joint understanding, intentions, and expectations that the relationship among the Partners will continue to flourish in future projects on similar terms and conditions as set forth in this Agreement, but there shall be no legal obligations among the Partners to so continue such relationship in connection with future projects.
8. Time and Salary. Until and unless otherwise decided by unanimous agreement of the Partners, Martin A. Smith shall act as Managing Partner and shall be empowered to conduct the day-to-day business of the Partnership. Each Partner shall nonetheless be expected to devote such time and attention to Partnership affairs as shall from time to time be determined by agreement of the Partners. No Partner shall be entitled to any salary or to any compensation for services rendered to the Partnership or to another Partner.
9. Transfer of Partnership Interests.
A. Restrictions on Transfer. None of the Partners shall sell, assign, transfer, mortgage, encumber, or otherwise dispose of the whole or part of that Partner’s interest in the Partnership, and no purchaser or other transferee shall have any rights in the Partnership as an assignee or otherwise with respect to all or any part of that Partnership interest attempted to be sold, assigned, transferred, mortgaged, encumbered, or otherwise disposed of, unless and to the extent that the remaining Partner(s) have given consent to such sale, assignment, transfer, mortgage, or encumbrance, but only if the transferee forthwith assumes and agrees to be bound by the provisions of this Agreement and to become a Partner for all purposes hereof, in which event, such transferee shall become a substituted partner under this Agreement.
B. Transfer Does Not Dissolve Partnership. No transfer of any interest in the Partnership, whether or not permitted under this Agreement, shall dissolve the Partnership. No transfer, except as permitted under Subsection 9.A. above, shall entitle the transferee, during the continuance of the Partnership, to participate in the management of the business or affairs of the Partnership, to require any information or account of Partnership transactions, or to inspect the books of account of the Partnership; but it shall merely entitle the transferee to receive the profits to which the assigning Partner would otherwise be entitled and, in case of dissolution of the Partnership, to receive the interest of the assigning Partner and to require an account from the date only of the last account agreed to by the Partners.
10. Death, Incompetency, Withdrawal, or Bankruptcy. Neither death, incompetency, withdrawal, nor bankruptcy of any of the Partners or of any successor in interest to any Partner shall operate to dissolve this Partnership, but this Partnership shall continue as set forth in Section 3, subject, however, to the following terms and conditions:
A. Death or Incompetency. In the event any Partner dies or is declared incompetent by a court of competent jurisdiction, the successors in interest of that Partner shall succeed to the partnership interest of that Partner and shall have the rights, duties, privileges, disabilities, and obligations with respect to this Partnership, the same as if the successors in interest were parties to this Agreement, including, but not limited to, the right of the successors to share in the profits or the burden to share in the losses of this Partnership, in the same manner and to the same extent as the deceased or incompetent Partner; the right of the successors in interest to continue in this Partnership and all such further rights and duties as are set forth in this Agreement with respect to the Partners, the same as if the words “or his or her successors in interest” followed each reference to a Partner; provided, however, that no successor in interest shall be obligated to devote any service to this Partnership and, provided further, that such successors in interest shall be treated as holding a passive, rather than active, ownership investment.
B. Payments upon Retirement or Withdrawal of Partner.
(1) Amount of Payments. Upon the retirement or withdrawal of a Partner, that Partner or, in the case of death or incompetency, that Partner’s legal representative shall be entitled to receive the amount of the Partner’s capital account (as of the end of the fiscal year of the Partnership next preceding the day on which the retirement or withdrawal occurs) adjusted for the following:
(i) Any additional capital contributions made by the Partner and any distributions to or withdrawals made by the Partner during the period from the end of the preceding fiscal year to the day on which the retirement or withdrawal occurs;
(ii) The Partner’s share of profits and losses of the Partnership from the end of the preceding fiscal year of the Partnership to the day on which the retirement or withdrawal occurs, determined in accordance with generally accepted accounting principles, consistently applied; and
(iii) The difference between the Partner’s share of the book value of all of the Partnership assets and the fair market value of all Partnership assets, as determined by a fair market value appraisal of all assets. Unless the retiring or withdrawing Partner and the Partnership can agree on one appraiser, three (3) appraisers shall be appointed[em]one by the Partnership, one by the retiring or withdrawing Partner, and one by the two appraisers thus appointed. All appraisers shall be appointed within fifteen (15) days of the date of retirement or withdrawal. The average of the three appraisals shall be binding on all Partners.
(2) Time of Payments. Subject to a different agreement among the Partners or successors thereto, the amount specified above shall be paid in cash, in full, but without interest, no later than twelve (12) months following the date of the retirement or withdrawal.
(3) Alternate Procedure. In lieu of purchasing the interest of the retiring or withdrawing Partner as provided in subparagraph (1) and (2) above, the remaining Partners may elect to dissolve, liquidate and terminate the Partnership. Such election shall be made, if at all, within thirty (30) days following receipt of the appraisal referred to above.
11. Procedure on Dissolution of Partnership. Except as provided in Section 10.B.(3) above, this Partnership may be dissolved only by a unanimous agreement of the Partners. Upon dissolution, the Partners shall proceed with reasonable promptness to liquidate the Partnership business and assets and wind-up its business by selling all of the Partnership assets, paying all Partnership liabilities, and by distributing the balance, if any, to the Partners in accordance with their capital accounts, as computed after reflecting all losses or gains from such liquidation in accordance with each Partner’s share of the net profits and losses as determined under Section 5.
12. Title to Partnership Property. If for purposes of confidentiality, title to Partnership property is taken in the name of a nominee or of any individual Partner, the assets shall be considered to be owned by the Partnership and all beneficial interests shall accrue to the Partners in the percentages set forth in this Agreement.
13. Leases. All leases of Partnership assets shall be in writing and on forms approved by all the Partners.
14. Controlling Law. This Agreement and the rights of the Partners under this Agreement shall be governed by the laws of the State of ___________.
15. Notices. Any written notice required by this Agreement shall be sufficient if sent to the Partner or other party to be served by registered or certified mail, return receipt requested, addressed to the Partner or other party at the last known home or office address, in which event the date of the notice shall be the date of deposit in the United States mails, postage prepaid.
16. General. This Agreement contains the entire agreement of the Partners with respect to the Partnership and may be amended only by the written agreement executed and delivered by all of the Partners.
17. Binding upon Heirs. This Agreement shall bind each of the Partners and shall inure to the benefit of (subject to the Sections 9 and 10) and be binding upon their respective heirs, executors, administrators, devisees, legatees, successors and assigns.
In Witness Whereof, the Partners have executed this Agreement the date first above written.
There is very little to comment on this contract as it is neat and tidy. The largest equity partner will be acting as General Manager of the partnership until it is decided otherwise by the remaining partners. This partnership is totally plain vanilla and could be used for an auto parts store as easily as a music company. A General Partnership is a good place to start. And, if the partners are in agreement, relatively easily transformed into a Limited Partnership, LLC, Sub S or C Corporation at a later date if the business grows or another round of investment needs to be sought out.
The most important thing to consider when joining into a General Partnership is that there is no layer of liability protection for the partners. If the partnership gets sued and the assets of the partnership are inadequate to cover the judgment, the prevailing party can blow right through the partnership to the personal assets of the partners. This is why General Partnerships are often modified to other business types within months of the initial formation. A structure is in place to start conducting business, but hopefully liability protection will come into play before the enterprise grows large enough to be viewed as target for litigation.
Other Business Platforms
The General Partnership is great for sorting out who shares in what. But, what will occur when a key member exits, for example the General Manager in the above deal? There are other ways to skin this cat that are much more comprehensive and consequently expensive. A formative General Partnership may serve to cover some bases early on, but it is the more formal and consequently more expensive business types that afford liability protection to the participants. Let’s take a look at the most common and see some of their strengths and weaknesses.
The Limited Partnership
This is a common vehicle for a new business startup. The Limited Partners own a percentage of the business but have no direct say in the day-to-day business. The limited partners have a layer of liability protection as most lawsuits will not blow through the partnership to the limited partners. One of the reasons that limited partnerships are showing a downturn in popularity is that business losses don’t pass through to the partners. If the business has ten investors and loses $100,000 in a given year, the business gets a write off for the bad year but the write offs don’t pass through directly to the investors. This change was made in the late 1980’s and has slowed the injection of cash to small businesses and startups. If your rich Uncle Bob invested in you and lost, he could write it off in those days.
This is very similar to a limited partnership and is described by some as the best of both a partnership and a corporation. The LLC offers tax advantages and liability protection for the members. Generally speaking each member’s personal liability is limited to the amount of their investment. If an LLC only has one partner, the IRS will view it as identical to a sole proprietorship. Members will also be taxed as if partners with profits and losses flowing through to the members tax returns directly. An LLC will also allow for foreign investment where general or “C” corporate structures generally require U.S. citizenship or residence to participate. LLCs have accounting hoops you must jump through but there is a more casual approach to other parts of administration. For example, no annual board meetings or corporate minutes are required. Last and not least, an LLC is not limited to the number of partners (investors) as some corporate models are. Some of the IRS forms common in LLC filings are Form 1065, K-1, and 1040 with Schedule E. Examples of these forms are on the CD.
Sub Chapter S Corporation
The tax status of an “S” corporation is similar to a limited partnership or LLC in that flow-through taxation is also a prime component of the platform. The stockholders in an “S” corp will show the profits or losses of the corporation on their individual tax filings. Like the other common corporate models, annual meetings and reporting to investors is quite formal and necessary.
Another limitation to a sub S corporation is that, for the most part, only individuals may participate. Not only is it limited to individuals, but the sub S is also limited to only 100 investors. There is some room in the law for the participation of some trusts or other entities that act as individuals, but investment by another corporation or business is not allowed. Like the “C” corporation, all allocation of dividends or other assets of the company are in direct proportion to the amount of stock being held by the individual investors. The more stock owned by an investor, the stronger their voice in management.
A “C” or general corporation is probably the most common vehicle found in medium to large enterprises. One of the major down sides to a “C” corporation is that it can result in “double taxation” for the stock holders. The corporation first pays taxes at the corporate level on net income. Should dividends be paid to stockholders, they in turn will have to declare this income on their individual returns.
Another aspect of the “C” corporation is that distributions to shareholders must be in proportion to the number of shares they hold. This makes a “C” corporation a bit more democratic in terms of stockholder equity. At the end of the day, the stockholders in a “C” corporation call the shots, and if they are unhappy, an election to change management or policies can be called by members at the annual meeting.
Everyone views things through the lens of their own bias. Greed is not unique to the music industry. When making business and legal decisions within the band or with outside third parties, everyone at the table has their own personnel agenda that will have to be addressed during negotiations. The secret to a successful deal is to balance all these agendas into a compromise that will work best for all the parties involved. Stalemates occur, sometimes to the point of killing the deal, but negotiating honestly and in good faith early on can take you further down the road and faster.
If I was the Today Tones drummer, who didn’t write any songs for the group, I might look at it like this:
“There are five members in the band. If we are to share equally in the band’s success and we don’t add or remove any members, we should each receive 20 percent of the band’s income.”
If I was the lead singer, who is the primary writer in the band, I might have a slightly different outlook.
“I’m the core figure in the band’s image; I’m the front man and I write the songs. I should be paid as two people. That would mean we cut the pie six ways where I get two shares and the other members get one. Of course, I would keep all the writer/publisher rights to all my songs.”
The bass player has a simple formula in mind:
“There are five of us. Split five ways, that’s 20 percent each. The rhythm section has to stick together.”
None of these scenarios are realistic. A great deal more thought will have to go into the sharing percentages of the band’s income and assets. Our previous worksheet might fall short of what really needs to be spelled out; thus the need for something more comprehensive than a simple partnership or sole proprietorship. We will need to start working our way towards hooking up with a label or management.