"When" vs. "If:" Should Your Band Incorporate?
When musicians come together to form a band, the legal structure of their relationship is rarely the first thing on their minds. The focus is understandably on the music, writing, recording, performing and building an audience.
However, as a band begins performing, earning revenue, purchasing equipment, entering into contracts and creating valuable intellectual property, its legal and business structure becomes increasingly important.
Depending on the circumstances, band members carrying on business together with a view to profit may constitute a partnership under Ontario law, even if they never formally agreed to create one. Alternatively, the members may decide to conduct the band's business through a corporation.
Neither structure is necessarily appropriate for every band. The important question is not simply whether a band should incorporate, but when incorporation makes sense based on the band's particular stage of development, business activities, revenue, liabilities and long-term objectives.
What Is A Partnership?
Under Ontario's Partnerships Act, a partnership is the relationship between persons carrying on a business in common with a view to profit.
This means that musicians do not necessarily become legal partners simply because they perform together. Whether a partnership exists depends on the nature of their relationship and activities.
Where the legal test is satisfied, however, a partnership can arise without the members signing a formal partnership agreement or expressly declaring themselves to be partners.
This can create significant consequences because, in the absence of an agreement addressing certain matters, the default provisions of Ontario's Partnerships Act may govern aspects of the relationship.
For that reason, bands operating as partnerships should strongly consider entering into a written Band Partnership Agreement.
What Should A Band Partnership Agreement Address?
Every band's circumstances are different, but a properly prepared Band Partnership Agreement may address matters such as:
ownership interests and contributions of the members;
management responsibilities and decision-making authority;
allocation and distribution of income and expenses;
banking and financial authority;
ownership and use of band equipment and other assets;
admission of new members;
withdrawal, departure or expulsion of a member;
use and ownership of the band's name and branding;
intellectual property considerations;
songwriting and composition ownership;
recording and performance-related rights;
touring and performance obligations;
what happens if a member dies or becomes unable to participate;
dispute-resolution procedures; and
termination or dissolution of the band.
It is particularly important to distinguish between ownership of the band's business and ownership of copyright and other intellectual property.
Being an equal member of a band does not necessarily mean that each member owns an equal interest in every song, composition, master recording, trademark or other intellectual property asset associated with the band. Those rights should be considered and documented separately where appropriate.
Registering The Band's Business Name
A band operating as a partnership may also have obligations under Ontario's Business Names Act (BNA).
Generally, persons carrying on business in partnership must register the firm's name unless the applicable statutory exception applies.
A business name registration in Ontario is generally effective for five (5) years and must be renewed if the business intends to continue operating under the registered name.
Importantly, registering a business name does not, by itself, give the band exclusive proprietary rights to that name.
Bands developing a distinctive name or brand should separately consider whether trademark protection is appropriate. A trademark registration can provide substantially different rights from a provincial business name registration.
Advantages Of Operating As A Partnership
For a newly established band, operating as a partnership may provide a relatively straightforward business structure with fewer corporate formalities and potentially lower initial administrative costs than incorporating.
The members can also enter into a Band Partnership Agreement that establishes rules tailored to their particular relationship rather than relying solely on statutory default provisions.
A Band Partnership Agreement can address important questions before disputes arise. For example:
Who has authority to enter into contracts on behalf of the band?
Who controls the band's finances and bank accounts?
How are revenues and expenses allocated?
Who can purchase equipment or incur expenses on behalf of the band?
Who owns the band's name?
Who owns the songs and master recordings?
Can a new member join the band?
What happens if a member wants to leave?
Can a band member be removed and, if so, under what circumstances?
What happens to existing recordings, merchandise, equipment and other assets when a member leaves?
Addressing these issues while the members' relationship is positive can significantly reduce uncertainty if circumstances later change.
What Are The Risks Of A Partnership?
One of the most significant considerations associated with a general partnership is personal liability.
Under Ontario's Partnerships Act, every partner is generally jointly liable with the other partners for the debts and obligations of the firm incurred while that person is a partner. The legislation also imposes liability in certain circumstances involving wrongful acts and the misapplication of money or property.
Another important consideration is the authority of individual partners.
Each partner is generally an agent of the partnership and the other partners for the purposes of the partnership's business. An act undertaken by one partner in the usual course of the partnership's business may therefore bind the firm and the other partners, subject to the particular circumstances and applicable law.
For a working band, this can have practical consequences when members enter into performance agreements, purchase or lease equipment, engage producers or other service providers, incur expenses or otherwise make commitments on behalf of the band.
A properly drafted Band Partnership Agreement can establish internal rules regarding authority and decision-making. However, internal restrictions do not necessarily protect the partnership in every circumstance involving third parties.
How Are Partnerships Taxed?
A partnership is generally not taxed in the same manner as a corporation.
Instead, the partnership generally calculates its income or loss, and the partners report their respective shares for tax purposes.
The tax consequences will depend on the particular circumstances of the band and its members. Bands should therefore consult with a qualified accountant or tax professional regarding the tax implications of their business structure.
What is a Corporation?
A corporation is a legal entity separate from its shareholders.
An Ontario corporation can enter into contracts, own property and other assets, incur obligations, carry on business and sue or be sued in its own name.
If a band incorporates, the members may become shareholders of the corporation, and the corporation can become the entity through which the band's business activities are conducted.
Depending on the structure, the corporation may enter into performance agreements, receive revenues, purchase and own equipment, employ or engage individuals and own or license intellectual property.
However, incorporating does not automatically transfer the band's existing assets, contracts or intellectual property to the corporation.
If an existing band transitions from a partnership or other arrangement to a corporation, consideration should be given to properly transferring or assigning the applicable assets, agreements, intellectual property and other rights to the corporation.
How Does A Band Incorporate In Ontario?
A band may incorporate provincially under Ontario's Business Corporations Act ("OBCA"), or where appropriate, federally under the Canada Business Corporations Act ("CBCA").
Where the corporation will use a name rather than a numbered corporate name, applicable corporate name and NUANS search requirements should be considered.
Ontario corporations can now be incorporated electronically through the Ontario Business Registry ("OBR").
However, filing Articles of Incorporation is only one component of properly establishing a corporation.
Following incorporation, the corporation should generally be properly organized. This may include preparing organizational resolutions, corporate by-laws, share issuances, securities registers, director and officer registers and other corporate records.
Where multiple band members will become shareholders, the members should also consider entering into a Shareholders' Agreement.
When Should A Band Consider Incorporating?
There is no universal revenue figure or particular career milestone at which every band should incorporate.
Instead, incorporation may become worth considering as the band's business becomes more established, valuable or complex.
Relevant considerations may include:
increasing or recurring revenues;
significant touring or performance activities;
entering into higher-value contracts;
hiring employees or engaging contractors;
purchasing or owning significant equipment;
entering into recording, management, publishing, sponsorship or licensing agreements;
developing valuable intellectual property;
merchandising and other commercial activities;
increased exposure to contractual or operational liability;
retaining earnings within the business;
bringing in investors or other business partners; and
creating a more formal structure for ownership, management and governance.
For an established band operating as a commercial enterprise, incorporation may provide a clearer separation between the band's business affairs and the personal affairs of its individual members.
What Does Limited Liability Really Mean?
One of the principal reasons businesses consider incorporation is limited liability.
Generally, shareholders are not personally liable merely because they are shareholders for the corporation's contractual debts and obligations.
However, incorporation does not provide absolute protection from personal liability.
A band member may still face personal liability in certain circumstances, including where the individual personally guarantees a corporate obligation, enters into a contract personally, commits a wrongful act or is otherwise personally liable under applicable law.
Directors and officers may also have certain personal liabilities and statutory obligations arising from their respective roles.
For this reason, incorporation should be considered as part of a broader risk-management strategy rather than as a complete shield from liability. Appropriate commercial agreements and insurance coverage may also be important depending on the band's activities.
Are There Tax Advantages To Incorporating?
There may be tax advantages associated with incorporation in appropriate circumstances.
For example, a qualifying Canadian-controlled private corporation may be eligible for preferential corporate tax treatment on certain active business income, including the small business deduction, subject to the requirements and limitations of applicable tax legislation.
However, there is no particular revenue threshold at which a band is legally required, or necessarily advised, to incorporate.
The decision will depend on factors such as the band's profitability, the amount of income being withdrawn by its members, whether earnings will remain in the corporation, the members' individual tax circumstances and the band's future business plans.
Bands considering incorporation should obtain advice from a qualified accountant or tax professional before making a decision based primarily on anticipated tax benefits.
Why Is A Shareholders' Agreement Important?
If several band members will own shares of the corporation, incorporating without addressing their relationship as shareholders may simply move unresolved issues from the partnership into the corporation.
A properly drafted Shareholders' Agreement can establish the rights and responsibilities of the shareholders and address matters such as:
share ownership;
voting and decision-making;
management responsibilities;
financial contributions;
restrictions on transferring shares;
admission of new shareholders;
departure or removal of a band member;
death or disability;
valuation and purchase of shares;
dispute resolution; and
dissolution or sale of the business.
The Shareholders' Agreement should also be coordinated with any separate arrangements concerning songwriting, publishing, master recordings, trademarks and other intellectual property.
Intellectual Property Should Not Be An Afterthought
For many bands, their most valuable assets may be their music, name, brand and other intellectual property. These assets can include:
the band's name and logo;
musical compositions and lyrics;
sound recordings and master rights;
photographs and artwork;
videos and other audiovisual content;
websites and domain names;
merchandise designs; and
social media accounts and other digital assets.
Creating a corporation does not automatically determine who owns these rights.
Bands should establish who owns existing intellectual property, who will own newly created intellectual property, what rights individual members retain and what happens to those rights if a member leaves or the band ceases operating.
Depending on the circumstances, these issues may require separate agreements in addition to the band's Partnership Agreement or Shareholders' Agreement.
What Are The Costs Of Incorporating?
Operating through a corporation generally involves greater initial and ongoing costs and administrative responsibilities than operating through an informal partnership.
Depending on the circumstances, these may include:
government incorporation and filing fees;
legal fees;
accounting and tax preparation fees;
annual corporate maintenance;
maintenance of the corporate minute book and registers;
annual returns and other government filings;
insurance;
trademark and other intellectual property protection; and
costs associated with future corporate changes or reorganizations.
These expenses should be considered alongside the legal, commercial, organizational and potential tax benefits of incorporation.
So, "When" vs. "If" Should Your Band Incorporate?
There is no universal answer.
A newly formed band playing occasional shows with limited business activity may determine that a properly drafted Band Partnership Agreement and appropriate business registration are sufficient for the time being.
An established band generating meaningful revenue, signing significant agreements, touring regularly, acquiring valuable assets or intellectual property, employing or engaging others, or otherwise operating as a substantial commercial enterprise may have stronger reasons to consider incorporation.
The key is to address the band's legal structure before a dispute, departure, significant contract or major financial opportunity forces the issue.
The better question may therefore be: “What legal structure is appropriate for our band now, and when should that structure change as our business grows?”
Conclusion
A band is not only a creative collaboration. As its activities grow, it can also become a significant business.
Whether a partnership or corporation is the appropriate structure will depend on the band's particular circumstances, stage of development, financial position, contractual relationships, intellectual property and long-term objectives.
Regardless of the structure chosen, band members should clearly document their respective rights and responsibilities, establish appropriate decision-making procedures and address ownership of the band's name, music and other intellectual property before disputes arise.
Ranieri Law assists musicians, artists and entertainment businesses with Band Partnership Agreements, incorporations, Shareholders' Agreements, intellectual property protection, commercial agreements and other entertainment and business law matters.
For more information about structuring or incorporating your band, contact Ranieri Law to schedule a complimentary initial consultation.
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