"When" vs. "If" Bands Should Incorporate?
When individuals decide to form a band, they often do not consider or are even familiar with the business structures that might be available to them. By default, bands are considered partnerships. Or they may defer to a more formal structure by incorporating. If bands continue to operate as a partnership, they should consider formalizing a partnership agreement sooner rather than later. There are various considerations when it comes to drafting partnership agreements, which can later be used as a guide when drafting shareholder agreements once incorporated. Each situation will be different, especially if a band has recently formed or has been around for years and is generating revenue. The first question any band should ask themselves is "when" should they incorporate rather than "if" they should?
What are Partnerships?
Under the Ontario Partnerships Act, a partnership is the formation of two or more persons carrying on a business in common with a view to profit. Without a formal agreement in place, the law already deems band members “partners” so long as there are two or more members in the band. Although not a requirement by law, it is strongly encouraged that band members enter into partnership agreements. This agreement will lay out the formalities between band members, including, but not limited to, the following:
Rights & Responsibilities;
Management & Decision Making;
Addition of New Members;
Withdrawal & Expulsion;
Songwriter & Performance Shares.
Bands must also register their business name under Ontario’s Business Names Act (BNA) if the partnership carries on business under a name other than the legal names of the partners. This protects the band’s name or business name from being used by anyone else in Ontario. To register a business name in Ontario, a nominal fee of $60 is required and the name must be renewed every 5 years.
What are the Pros of Partnerships?
Partnerships are generally attractive to newly formed bands. The main benefit of partnerships is that it is not as costly as setting up or maintaining a corporation. The only start-up costs to partnerships are if the members decide to formalize a partnership agreement and register their band's name.
Band members are strongly encouraged to enter into partnership agreements but are not required by law to do so. A partnership agreement amongst band members will override some of the general rules regarding partnerships if expressly provided for in the agreement. This allows members to tailor their partnership arrangement to their situation. The benefit of partnership agreements is that it lays out all of the rights and responsibilities of each member. Some questions that partnership agreements will address include: Who is entitled to make decisions for the band? Who is responsible for the finances and distributing income? Who can purchase equipment? Who owns the rights to certain musical compositions? How can you remove a band member?
Additionally, any income, assets or property brought in the band belongs to the band and is shared equally among the members.
What are the Cons to Partnerships?
In a partnership, the band members are jointly and severally liable for any debts, liabilities and obligations incurred on behalf of the band. In contrast to corporations, there is no limited liability and the band members would be personally responsible or liable for the actions of their other members. Each member is an agent of the partnership and the other members. Essentially, this means that the actions of one member or partner will bind the others. So if one of your band members decides to take out a loan or purchase equipment in the band's name without your knowledge, then all of the members would be responsible to pay back the loan or debt.
Partnerships are also not considered a separate tax-paying entity. Rather, each member would file an income tax return to report their share of the partnership's net income or loss. Thus, members are taxed at higher rates, as opposed to corporations.
What is a Corporation?
A corporation is considered a separate legal entity apart from its shareholders or owners. It can enter into contracts, own property and assets, acquire debt, sue and be sued.
To incorporate, a NUANS search is first conducted to determine whether your business name conflicts with an existing business and reserves that name. Once the business name is cleared, you may proceed to incorporation. To incorporate online in Ontario, third-party service provider fees are required in addition to the government filing fee. For more information and details regarding the incorporation process, you may also refer to our firm’s articles entitled “To Incorporate Federally or Provincially? That is the Question” and “The Costs & Benefits of Incorporation versus Business Registration.”
What are the Pros of Incorporating?
Incorporating provides certain benefits, including limited liability and tax incentives. Limited liability means that the shareholders or owners in the corporation are shielded from personal liability. In the event of any disputes, debts or liabilities against any of the members, it will be against the corporation only. In general, no one may come after the individual band members personally. For instance, if someone gets injured at one of your concerts, then that person may only sue the corporation and not the individual band members.
Additionally, corporations are taxed at lower tax brackets than individuals. If the band’s annual gross revenue is below a particular threshold, then it may be eligible for what is known as the Small Business Deduction (SBD). The ultimate question is at what point should bands incorporate? Generally, once a band’s annual gross revenue reaches a particular threshold say over $30,000 it might make sense to incorporate. For more information regarding tax advantages and revenue that bands should generate before incorporating, it is recommended that you seek the advice of an accountant.
What are the Cons to Incorporating?
Overall, the costs of incorporating and maintaining a corporation over time are more expensive than partnerships, especially for those who are just starting in the industry or are newly formed. Before incorporating, some costs to consider include initial start-up fees, government filing fees, third-party service provider fees (if filing online in Ontario), branding (registering your band's name as a trademark), insurance, legal and accounting fees, as well as annual tax returns. Moreover, corporations are required to maintain certain corporate formalities, including corporate minute books that can also be tedious and costly.
Both partnerships and corporations have their pros and cons. In determining when to incorporate, several factors need to be taken into consideration. Each client’s situation is unique and should be accessed on a case-by-case basis. Incorporating might be the solution for some bands while entering into partnership agreements might be the answer for others in their careers. Bands should, however, be proactive from the beginning and ask each other the hard questions before deciding to incorporate or formalizing a partnership agreement. It is often easier to discuss issues pertaining to money or removing a band member before they ultimately arise. For more information on the best solution for your band, Ranieri Law provides complimentary initial consultations.
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