Does Gnarls Barkley Have A LLC?
I have no idea, but they should. I know I have previously blogged about the importance of setting up a limited liability company for your band or even for yourself, if you are on your own. But it is important enough for me to expand on my previous message and give you some more examples of why it works so well for new or rising artists.
A LLC protects the owners of a company from being personally liable for the business debts of the company. In addition, unlike a corporation, a LLC avoids double taxation for its members (a member of an LLC is the same thing as an owner). All that stuff is great, but what the real gravy is, is the flexibility that a LLC gives you.
Let’s say you need a good deal of cash to produce your next album but you have already tapped your mom, your dad, your uncle and your fourth cousin twice removed. You have no credit so the bank is a definite no. Time to sell an organ? Not yet.
You can approach your family, your well-to-do neighbors, or a friend of a friend and offer them something better than a loan with a promise to pay it back. You can give them ownership in your music’s business. I know its scary to think of a stranger or even worse, your parents, having any sort of control of your business, but hear me out.
If you set it up the right way and document everything properly, you can give away ownership in your LLC while retaining 100% control of the business. For example: Your dad buys 10% of your LLC for $10,000. That does not mean that he gets a vote worth 10% or that he gets to sign contracts for you or that he can sell his 10% to anyone he wants. A LLC with the proper operating agreement can control all of this. You can limit your dad’s return to a maximum return on his investment of, let’s say 115%. That means, once your dad gets his $10,000 back plus another $1,150 he could be kicked out of the LLC. Keep in mind, as a member of the LLC he only gets any money back if the business does well and there is enough money to pass around.
This also works for band members. Maybe you use a sax player on one album, but only for that album. Chances are you don’t want to make him an owner of the business. The solution is to make him an independent contractor of the LLC and pay him just for the work he completes on that one album. On the other hand, lets say Thom Yorke leaves Radiohead and wants “in” to your new upstart project. You probably don’t have the scratch sitting around to sign Thom. Solution: offer him 25% ownership of the LLC. Most likely the new band featuring Thom will be successful and he will get paid through all the revenue that the LLC (which owns the band) earns.
Make sense? Let me know. I could go on and on
I’m off to South by Southwest where the independent artists reign supreme.
How does the pass through nature of the LLC taxation impact the members? For example, if the LLC suffers a loss then (unless the LLC elects to be taxed as a corporation) doesn’t the LLC loss pass through to the members? Do you suggest limiting the profit/loss splits in the operating agreement?
Thanks for the article.
Good question. Keep in mind I’m not a CPA, but the losses will be allocated to the capital accounts of the members. So, if there are 5 members with each member starting out with h $100 in his capital account and the company loses $100 in a year, each capital account will be decreased by $20. The individuals then list the $20 loss on their individual tax return. This should all be set out in the operating agreement. If there is no money left then it is up to the manager and the members to decide whether to dissolve or put more money in to the company. Hope this helps.