I field a fair number of calls from people who, despite what they’ve read about the decline of the recorded music industry, want to know how to start a record label. As it turns out, starting a record label is not too complicated; the hard part is figuring out how to make it a financially successful one. Below are some of the most important initial steps to get you ready to sign artists and release music. As for the financially successful part – you’re on your own for now (although the below will certainly help).
Incorporate Your Business
While incorporation isn’t strictly required, I highly recommend it. I generally recommend an LLC, at least initially, due to the ease with which you can establish it, and the relative cost of maintaining it versus, say, an S-Corp, which may make sense for your business once you’ve achieved a certain level of financial success, but which is more expensive to set up and properly maintain. In Georgia, the actual cost of incorporating as an LLC is $100 and then $50 every year thereafter to renew. Incorporation is absolutely a step that you can do yourself if you have the time and inclination, or you can have an attorney do it for you.
So why incorporate if it’s not required? Sure, you can run your business as a sole proprietor or a partnership, but incorporation has the duel purpose of protecting you from personal liability (if structured and run properly) and making you look a little more professional. Once you incorporate, apply for an Employer Identification Number (yes, you should get this even if you don’t have any employees). You can get it free here. Again, obtaining an EIN is something that you can absolutely do yourself, although you can have an attorney do it.
Open a Bank Account
Take your incorporation documents and your EIN number and open a bank account. Which bank? Doesn’t matter. Some charge fees, some don’t. Pick one that is convenient for you. Remember the thing I said about incorporation protecting you from personal liability? That means that if someone has a claim against your record label, then they can only sue your record label, and can only satisfy any judgment that they may obtain from the assets of your record label, versus suing you as an individual and satisfying a judgment from your personal assets like your car, house, personal bank account, salary from your day job, etc.
But, in order for your corporation to shield you from personal liability, you must, among other things, keep your personal assets and your business assets separate. A separate bank account solely for your business funds is therefore the second thing you should do after incorporating as discussed above. Plus, it makes profits and losses easier to track. And, yes, you look more professional. Make sure to order checks for the business account as well.
Get an Operating Agreement (or a Partnership Agreement)
Here in Georgia, LLCs are not strictly required to have operating agreements, but I strongly recommend them for companies with more than one member. If you’re a single-member LLC, then you can do without an operating agreement, although some people still opt for them just in case they add a member down the road or for the sake of completeness (and, arguably, having an operating agreement, even for a single-member LLC, can help prove that the LLC was, in fact, operating as an entity separate from its owner, such that the owner cannot be held personally liable for the debts and losses of the business).
The reason why it’s especially important, though, for you to create an operating agreement if you have more than one member of the company is because things change, relationships can fall apart. Money can complicate things. Your partner may want to leave the company or sell his ownership stake. Your other partner may want to shut the company down and, oh, yeah, she also wants the rights to the company name. Someone may die and their heirs may inherit their stake in the company, or they may get divorced and their wife may somehow wind up with the ownership stake, thus forcing you to do business with someone with whom you never thought you’d have to do business. Plus, without an operating agreement, you’re a de facto partnership, and the de factor partnership rules apply (as set by your state – here’s Georgia’s). And some of those default rules are downright nutty. You don’t want to be bound by those rules, trust me – you want to think carefully and deliberately about your business and set forth, in a written document, what rules will bind you and your partners.
Note that even if you don’t incorporate, if you have one or more partners, then you should have a partnership agreement. It’s the same document as the operating agreement, except that it’s for partnerships; it covers the exact same ground as the operating agreement.
Whether you need an operating agreement or a partnership agreement, this is something you can also technically do yourself, but I wouldn’t attempt it unless you have, or can cultivate, a thorough understanding of the default rules (so that you can make sure to trump them in your operating agreement, if you so desire) and are certain that you’ve addressed all of the major issues typically addressed in such an agreement drafted by an attorney. Even if you don’t hire an attorney to draft the agreement, your co-owners may hire one to review the one you drafted. Plus, if there is a falling out, then assuming there’s some money at stake, the first thing the other side is likely to do is comb through the agreement you drafted and identify weaknesses and holes. If you have to hire an attorney at that point, then you’re likely to spend more money and the stakes will be higher. Get it done right on the front end.
A final note about LegalZoom: yes, they can incorporate you and provide you with a vanilla operating agreement, but, unless you opt for some sort of heightened service with them, the operating agreement with which they provide you is barely worth what little you pay for it. My firm does all of the services discussed in this article for flat fees (depending on how much you need done). Before opting for LegalZoom for any services, contact me.
Get an Exclusive Artist/Recording Agreement
Your record label will need a variety of agreements, but the most important one is the exclusive artist agreement. There are plenty of ways to approach this agreement – you can make it a transfer of sound recordings or a license. You can participate in ancillary revenue streams like tour, publishing, and merchandise. You can pay your artists on a royalty basis or a net profits basis, and the percentages for each can vary. You can ask for a number of options. You can insert certain creative controls. The agreement can be as simple (within reason) or as complicated (again, within reason) as you’d like it to be. I’ve drafted simple, eight-page net profit deals as well as 40-page major record label-style agreements.
This is typically not an area where you want to work on a handshake basis. Plus, once you have an exclusive artist agreement, you can use it again and again to sign other artists, although maybe with a few tweaks here and there as you go. Yes, you can find templates online, but do not use them. Many of those agreements are dated, incomplete, and not suited to the kind of label you may want to establish. Drafting your own exclusive artist agreement is not something you should do unless you know and fully understand the industry. My firm drafts these agreements for a flat fee (often in combination with some of the other stuff listed in this article), and we include the first two hours of negotiation of the agreement.
Get a Business License
Hey, your city or county wants in on the action too. You’ll need a business license in the city or county in which your business is based. Not gonna lie, this part sucks. For Atlanta, you have to fill out a bunch of forms and wait in a few lines before they issue you your license, and what exactly you need to fill out isn’t entirely clear. Some counties make it easier than others. There’s usually some sort of fee, and then you will need to make a tax payment down the road.
Affiliate with PROs
If your label is participating in publishing, then you need to set up as a publishing company with one of the PROs (ASCAP, BMI, SESAC). Which one? Up to you. But you can only join one. These companies collect public performance royalties for musical compositions. You should also, even if you aren’t participating in publishing, join SoundExchange, because SoundExchange collects for digital performances of sound recordings. As a record label, you will either own or exclusively license the sound recordings of your artists. Therefore, you should be collecting that royalty from SoundExchange. Note that you join SoundExchange in addition to joining ASCAP, BMI, or SESAC. This is something that most clients do themselves, but my firm can help you to properly register with the applicable PROs.
One more thing that is somewhat related – if you are participating in publishing, then you might consider finding a publishing admin company. The admin company can do a better job of collecting royalties than you can yourself. You should also start thinking about licensing (whether of the sound recordings or the publishing or both), and potentially partner with a placement company to try to secure placements for the songs with which your company is working. As a record label, a super important thing is to properly promote your artists. If you have the infrastructure to do that in-house, then great, but many companies, at least eventually, hire a publicity firm to work their releases. You don’t want to spend a bunch of money on your artists only to release their albums into the void and have them disappear almost immediately. Publicity from a reputable company can be key, although, yes, it is an investment (which hopefully you can recoup from sales). At some point, the label may also want to retain an accountant or bookkeeper. Finally, how will you be distributing the music of your artists? You may be going through a digital distributor like TuneCore, CD Baby, etc. Are you distributing physical product? You may need to start trying to get an independent distributor for your label (easier said than done, and they will insist on distributing digital too). In this industry, personal relationships are everything, so start networking and building contacts now.
Sign Good Artists, Treat Them Fairly
Last step – sign good talent and treat them fairly. Only sign artists to whom you are committed. Always honor the accounting provisions of your record deal – in my experience, this is the biggest source of strife between artists and record labels. The artist may not know the extent of your investment, and may believe that they’re entitled to royalties earlier than they actually are. They may begin to think that you’re not paying them what they’re owed. I recommend sending statements regularly (at least semi-annually, if not quarterly), even if the artist is unrecouped. You can do this in-house, or work with an accountant or bookkeeper. Remember, you’re building your company’s reputation here.
There’s plenty of other stuff you could do to promote your new business, but the above are the initial steps and initial considerations. My firm can help you with all of the above tasks, usually for flat rates. We have assisted dozens of startup record labels over the years. A consultation is always included, just to make sure that we’ve addressed the major issues, some of which you might not know were issues. Feel free to contact us to discuss.