Starting a Record Label – Part 2 of 5

This is part 2 of our five part series on Starting a Record Label. In our previous post (Part 1 of 5), we introduced the idea of starting a record label – to begin thinking about what it means to run a record label from a business perspective.

If you want to start a business, then you have to form a business. And to form a business entity, it is crucial that you think ahead and take important steps now to ensure your record label’s long term success.

For example, did you know that you could register a name for your Limited Liability Company (LLC) with New York State but be prohibitied from using that name in public (as your brand name)? Fail to do all of your research, and you might be receiving a cease and desist letter from an attorney that represents a record label (or a similar type of company) that already owns the name.

Here are many of the steps necessary to forming a business entity:

1. Select 3-5 potential business names for your record label. When selecting a business name that you intend to use as the name of your brand (versus X Holding Group with a d/b/a for the name of your brand), you must consider filing for a federal trademark (or service mark) simultaneously with the formation of your business entity (part of our discussion in Part 3 of 5 of Starting a Record Label). At the very least, a search of your state’s corporate names database and the U.S. Patent & Trademark Office’s trademark registration should be undertaken. Once a preliminary determination is made that your proposed name appears to be free and clear, you can then form your business entity.
2. Form Your Business Entity. Not so fast… are you going to form a limited liability partnership? Corporation – C or S? Limited liability company? Sole proprietorship? Shareholders? Investors? Members? Partners? Double Taxation? Pass-Through Taxation? Pierce the Corporate Veil? New York’s Publication Requirement for LLCs? The ultimate decision on which entity to form depends a lot on how many “partners” are involved now and your long-term growth plan in the future. An attorney that specializes in business formation in the entertainment industry will be able to assist you in selecting the best entity for your business. For example, while an LLC doesn’t require strict adherance to formal business action (as compared to a corporation), state law in New York requires that you publish notice of your intent to form an LLC before that company has certain rights.
3. Obtain an Federal EIN. This simple step is the key to enabling your business to open a bank account. In addition to your certificate of incorporation or organization (or other certificate verifying your business formation), this identification number will be needed before you will be able to capitalize your company. Note: You may also need to file other federal IRS forms (e.g. S-Corp. Status), as well as state and/or local tax forms depending on your business structure.
4. Draft an Internal Operating Agreement / Shareholder Agreement. Whether you are a single-member limited liability company or a 10-person partnership or a 50 shareholder corporation, you are going to need a document outlining the rights of the parties as they relate to the business entity. Remember, your business entity (in many situations) is a separate being, and even if you are the only shareholder of your company, you have to enter into an agreement between you as shareholder and your corporation. 
5. Operate like a Professional Business. Not only should you operate like a first-class company for your shareholders and potential business partners, but your failure to do so could lead to someone “piercing your corporate veil” – just some legal jargon that means you could be personally liable for the actions of your business. This defeats the main purpose for forming a business entity in the first place. So, keep your books in order, document corporate action, never co-mingling business accounts with personal accounts, only act within your authority, and ALWAYS sign documents as an authorized agent of XYZ company (and never personally). Depending on the volume of your corporate action, you may want to consider having an attorney on retainer to ensure that all of your documentation is in order and current.

As you now know, starting a record label is more than recording an album in your basement and simply putting it out there. Well okay, you could do this too… but if you want to operate a record label in the big leagues, forming a business entity is just the first step.

In Part 3 of 5, we will discuss the importance of filing for a federal trademark with the United States Patent & Trademark Office.

Click Here for Part Three