So, You Want to Start a Rock 'n Roll Band? By Kory KIein Principal, Business Management "So you want to be o rock 'n roll stor, then listen now to what I sdy..." - Roger McGuinn, The Byrds, 1967 It may seem like an easy thing to do, but starting a band and making it to band practice is just half the story. Here are some important points you need to consider before you decide to hop on that tour bus. The Band is a Business The first and most important step in running your band's business is to accept the fact that it rs a business. Producing music is your band's creative work. Selling that music is a business venture. Like any business, the band members should agree ahead of time how the business will run, how rev- enues will be distributed, what happens if one or more members leaves the band and, lastly, what type of entity structure is the most appropriate for your situation. Legal Entities ln a sole proprietorship, you own and operate the band by yourself and are personally liable for business debts. you pay the other band members either as employees or as independent contrac- tors. You do not file a separate business tax return. The income and expenses qualify for pass-through treatment. Pass-through tax treatment means that the taxes of a business are "passed through" to the tax return of the indi- viduals owning the business. Sole pro- prietorships, partnerships, most LLCs and Subchapter S corps qualify for pass- through status. Pass-through status also means that these business entities are not subject to double taxation as are the C-corps. Perhaps, to the surprise of many band members, the very act of starting or joining a band is a legal decision to form an entity. When two or more people engage as co-owners in a business for profit, state laws regard that entity as a general partnership. A general partner- ship does not require formal creation. You could be out having drinks with some music friends, say "Let's form a band" and if two more people are in agreement, then you have formed a general partnership. The obllgations of a partnership are not limited to the partnership itself or the contributions of the partners. lnstead, partners are jointly and severely liable for all obligations of the partnership which could potentially have serious consequences. Thus, most businesses form corporations or LLCs to avoid this unlimited liability, Not all band members are partners/ owners, whether through a partnership, LLC or as shareholders of a corpora- tion. ln fact, this is commonplace. The band entity may simply contract for, or employ the services of, other musicians. Both corporations and LLCs come into existence only after the band files the appropriate documents with a state agency. ln the case of corporations, the document filed is the articles of incor- rlcz. poration. For the LLC the document filed is the articles of organization. Benefits The single most important benefit of corporate or LLC structure is limited liability. This means that the entity is responsible for the contractual liabili- ties (and tort liabilities, such as an accident) rather than the owners of the band (with certain exceptions), This eliminates a guarantee to third par- ties that each band member/owner will have to pay for all expenses if the band/entity itself is unable to meet its obligations. These entities formally distinguish between the owners of the band and those that manage and work for the band. As briefly mentioned above, because of the unlimited liability and default rules for partnerships, they are strong enough reasons by themselves that bands should form limited liability busi- ness entities in the form of corpora- tions or LLCs as soon as they begin to operate. Another benefit is that you can raise money and have people invest in your company. Further, unlike a gen- eral partnership, if a member of an LLC withdraws, the LLC still exists. This structure allows for band members to shift in and out of the company. Tax treatment is an important consid- eration for the management of the band, but the strategies for minimiz- ing tax liability may vary depending upon the nature of the income and the ownership. Since owners of an LLC and owners of a closely held corpora- tion electing S corporation status can choose to be treated as a partnership for tax purposes, the nature of taxation need not dictate the choice of organi- zational form. The creation of a closely held corpora- tion or LLC provides an individually separate and distinct entity that can > This article can be read online at: www. rbz.com/rock-sta r/ > own the band's assets, enter into employment, production, and other agreements, thus helping to better distinguish between the band and its members. The formal creation of the band as a corporation or LLC is essential to good band management. As one size does not fit all, you should consult with your tax advisor/CPA about what type of entity structure(s) is the most appropriate for your situation. For more informotion on Business Management, Kory can be contacted by emoil, kklein@rbz.com, or phone, 3L0-478- 4L48 x5822 Connect With Us! RBZ has gone social. We invite you to join the conversation! E./company/RBZ-LLP Jl /Pezouzz ':,;t /RBZbuzz Nonprofitsr Bits and Pieces By Thomas J. Schulte Partner ln-Charge Nonprofit Practice Group There is a lot of miscellaneous news about the nonprofit industry to report, so I have broken it down into bits and pieces for you. Tax Exempt Applications As a follow-up to the story that seem- ingly will never end, the IRS has announced it will no longer screen approximately 80% of the organizations seeking tax-exempt charitable status each year. A change which will ease the creation of small charities while doing away with a review intended to counter fraud and prevent political and non-charitable groups from misusing the tax code. As of July 1, any group that pays a Sa00 fee and declares on a three-page online form that it has annual income of less than 550,000, total assets of less than 5250,000 and is in compliance with the tax-code requirements of a charity will automatically be allowed to accept donations that are tax-deductible for the donors. Top 10 Major Donor Fundraising Trends And no, the ice bucket challenge is not among these (but at $20mm - and counting - incoming for ALS, it may be in next year's). Check out the Fired-Up Fundraising blog at www.gailperry.com for some trends you may not have seen coming, Iike the introduction of the boomer generation who are now 34% of all donors but provide 43% of all the money. Interesting reading. can also be found California Raises the Bar on Suspending Exempt Entities The California Franchise Tax Board (FTB) has one-upped the IRS in its ability to suspend the activities of an exempt organization possibly resulting in a revoked exemption. The three primary ways range from tasks as mundane as failure to file the annual Statement of lnformation with the Secretary of State, to as vague as failure to pay an amount due or as obvious as failure to file any past due tax returns with the FTB. Reinstating a revoked tax exempt status isn't a lot of fun so even the mundane must now be given stricter attentio n. Visit w w w.ft b. c a. g ov/ b u si n e s se s/ exe m pt_o rgo nzi ati o n s/su s pe n d e d for more information. How Tax Exempt is a Tax Exempt Entity? RBZ issued out a recent email blast which addressed the sales and use tax requirements of tax exempt entities as explained in the California Board of Equalization its recent Publication 18. This answers many questions we get on a daily basis. lf you did not get the blast, it can be found on our website at: www.rbz.com/pu bIication-L8/. Accounting for Restricted Monies All has been quiet on the "new pro- posed accounting standards" desk for a while. lt doesn't mean they aren't busy coming up with new proposed (Continued on page 6) D www. rbz.com/non profit-bits/ www. rbz.com | 370 -47 8- 4148 Nonprofit