LLC’s, Corporations, And Other Business Structures - Part III: Written By New York Entertainment Lawyer And LLC Counsel John J. Tormey III, Esq.

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LLC’s, Corporations, And Other Business Structures - Part III: Written By New York Entertainment Lawyer And LLC Counsel John J. Tormey III, Esq.

© John J. Tormey III, PLLC. All Rights Reserved.

This article is not intended to, and does not constitute, legal advice with respect to your particular situation and fact pattern. Do secure counsel promptly, if you see any legal issue looming on the horizon which may affect your career or your rights. What applies in one context, may not apply to the next one. Make sure that you seek individualized legal advice as to any important matter pertaining to your career or your rights generally.

Part II of this article discussed how individuals historically incorporated their businesses in the hopes of avoiding personal liability, but then often became dissatisfied with the so-called “double taxation” thereby resulting. This, among other motivations, brought the S-corporation and then, the limited liability company (LLC), into being. As a New York entertainment lawyer practicing in this day and age, I most often see limited liability companies (LLC’s) as opposed to other forms of entities used in film, music, television, publishing, and Internet businesses. However one cannot understand and appreciate the advantages typically provided by the limited liability company (LLC) unless superimposed as bas-relief upon the entity’s historical context – which gives further meaning to the LLC across all sectors and industries including entertainment and media.

Society clearly benefits from encouraging people to start businesses - and take some commercial risks without an attendant risk of personal ruin. Yet otherwise well-intentioned and well-motivated people were either quitting businesses or exposing themselves to personal liability - in both instances due to their aversion to the so-called “double layer of taxation” engendered by the C-corp. Additionally, the “double” taxation of the C-corp was creating a disincentive for new people to go into business - particularly those who were risk-averse. There had to be a better way.

That better way, at the time, was the S-corp, which came into existence a number of years ago principally for the above types of reasons and rationales. It was named after a “Subchapter-S” in the Internal Revenue Code of the United States, and was regularly recognized by the IRS and state tax authorities alike. One of the familiar tasks for an entertainment lawyer became the act of ensuring that clients timely made their appropriate S-corp elections (see below) with appropriate governmental authorities – hardly the romantic notion one would have of what it is like to interact with talent and go to celebrity premieres..

Akin to the C-corp in most other respects, the S-corp only mandated a single layer of taxation, as opposed to the C-corp’s double layer of taxation. But there were also a few catches.

One had to make a formal written “election” (or in some cases, “elections”) to qualify as an S-corp. If one didn’t do so in time by a strict deadline, one would lose S-corp status and be “doubly” taxed like a C-corp instead. As most entertainment lawyers can attest, this kind of eventuality could actually snuff out a fledgling entertainment or media start-up business in its first years of existence, already engaging in risky and speculative business activity as is often the case in media and entertainment.

There were other restrictions on S-corps, too, such as a limit on the number of shareholders, a limit on foreign ownership, and a limit on corporate parent-subsidiary ownership. Some of these restrictions have been loosened - and in some cases eliminated - in recent years; so one should not rule out the S-corp without first updating its tax code requirements with one’s lawyer – entertainment lawyer or otherwise – as well as one’s tax accountant. The historical restrictions of the S-corp put business owners in a “Catch-22” situation - they clearly wanted a single layer of taxation, but in the context of an entity that wasn’t so restricted. The newer solution: scrap the idea of a corporation at all, and instead form a limited liability company, or LLC.

The limited liability company (LLC) is akin to the S-corp but without most of the attendant historical restrictions. Yes, there were a certain number of restrictions on the LLC, too, when it first appeared on the scene - most of which were subsequently lifted by either the IRS or state legislatures, or both. Again, S-corp restrictions have also been lifted in recent years, making the S-corp and limited liability company (LLC) look more similar to each other as time goes on.

But even as of this writing, the limited liability company (LLC) is usually considered the most advantageous entity from a tax perspective of all 3 most commonly available forms, for the small business owner to create. As a media and entertainment lawyer, the LLC is the entity which I am most often asked to create. The LLC is also considered the most flexible of all 3 entities. What does “flexible” mean? Well, it is considered easier to adapt the LLC to later-occurring additional equity-holders in one’s business, for example, which is another familiar task for an entertainment lawyer in the context of artistic co-ventures - and the word “easier” in this context translates to “less legal fees”. The LLC is in most cases an entity which is easier to manage and administrate.

There are some disadvantages to the limited liability company (LLC), too. The LLC can take more time to finalize, and in some cases can be more expensive to form and/or file with the government - as compared to an S-corp. Some states historically prohibited 1-person LLC’s. Some states still have an underdeveloped body of judicial case law on the LLC, since the entity is still quite new in many states - so the treatment of the LLC under the law may be less certain than the treatment of a corporation. We in New York have an odd restriction, too, as a result of the powerful newspaper and media lobby galvanized during the legislation’s enactment which as a media and entertainment lawyer I suppose that I should not begrudge. This restriction may be present in another state or two as well in analogous form. The restriction is this: if one elects to form a New York LLC, one must publish its existence in periodicals for a number of weeks, before being accorded the legal privilege of initiating a litigation - as a plaintiff - in the LLC’s name in the New York courts. Publication of an LLC’s naissance in Manhattan is expensive - the publication of a limited liability company in periodicals of the creation of a proposed Manhattan LLC can range between $1,000 and $3,000 (the figures can vary and are smaller in other parts of New York State apart from Manhattan).

Even so, the limited liability company (LLC) is considered the trend-setting entity of those “in the know”, across the country. As an entertainment lawyer in New York, I have noticed that hipster Californians gravitate to LLC’s just as much as hipster New Yorkers seem to do. And part from hype, assuming that one can afford to form an LLC, and assuming that one can live with whatever restrictions apply to the LLC in one’s jurisdiction, it may in fact be the entity of choice, and an improvement over the older S-corp and C-corp structures.

A limited liability company (LLC), though frequently mistaken for a corporation, is technically not considered a corporation – rather, it is an unincorporated entity under the tax code, more like a partnership than anything else, but one that (like the S-corp and C-corp), if properly formed and maintained, should provide its members with insulation against personal liability.

If one doesn’t incorporate or form a limited liability company (LLC), the business will likely be what is known as either a sole proprietorship (if a 1-person company), or a general partnership, de facto or otherwise, (if comprised of 2 or more persons). Any entertainment lawyer or other lawyer will opine that this could result in unlimited personal liability for the entity’s owner or owners. Again, that means that an owner’s personal assets can be at risk to satisfy the obligations and debts of the business. Any entertainment lawyer or other lawyer will opine that personal liability is not a risk worth taking. In addition, using a corporate entity or limited liability company (LLC) – particularly an LLC in this day and age - could add a good deal of “cachet” or credibility to one’s business endeavors, in the eyes of other persons and companies with whom the business has contact.

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My law practice as an entertainment lawyer includes incorporations and the formation of limited liability companies (LLC’s). If you have questions about legal issues which affect your career, and require representation, please contact me:

Law Office of John J. Tormey III, Esq.

John J. Tormey III, PLLC

1324 Lexington Avenue, PMB 188

New York, NY  10128  USA

(212) 410-4142 (phone)

(212) 410-2380 (fax)

brightline@att.net

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Business Structures - Part III

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The Written Agreement Amongst Band Members: Written By New York Entertainment Attorney And Music Lawyer John J. Tormey III, Esq.

http://www.tormey.org/written.htm

Law Office of John J. Tormey III, Esq. – Entertainment Lawyer, Entertainment Attorney

John J. Tormey III, PLLC

1324 Lexington Avenue, PMB 188

New York, NY  10128  USA

(212) 410-4142 (phone)

(212) 410-2380 (fax)

brightline@att.net

http://www.tormey.org/

The Written Agreement Amongst Band Members: Written By New York Entertainment Attorney And Music Lawyer John J. Tormey III, Esq.

© John J. Tormey III, PLLC. All Rights Reserved.

This article is not intended to, and does not constitute, legal advice with respect to your particular situation and fact pattern. Do secure counsel promptly, if you see any legal issue looming on the horizon which may affect your career or your rights. What applies in one context, may not apply to the next one. Make sure that you seek individualized legal advice as to any important matter pertaining to your career or your rights generally.

As a music lawyer and entertainment attorney, I have seen references to the above-mentioned “Written Agreement Amongst Band Members” document, as both “Inter-Band Agreement”, and “Intra-Band Agreement”. Rather than initiate any argument with grammarians, bands, groups, record labels, or other music lawyers or entertainment attorneys as to which term is correct - although “intra” is probably technically closer to the mark - let’s simply call this all-important document the “Agreement Amongst Band Members”; or, “AABM”, for short. (As for the grammarians who want to debate the use of “amongst” versus “among”, well... you can discuss this amongst yourselves!)

Now, on to the issues of interest to musicians, groups, and bands who might be reading this article, and of interest to this New York music lawyer and entertainment attorney who is writing it.

“If one is a musician playing in a multi-member band or group, is an AABM needed?”

Quoth the music lawyer: “Absolutely, yes”.

“Should the band or group consider closing the AABM, prior to seeking to place the band’s demo CD recording with A&R (artists and repertoire) executives at record labels?”

Again, to quote the entertainment attorney: “Absolutely, yes”.

There are some parallels to an agreement amongst band or group members, on the one hand, and a pre-nuptial agreement between prospective spouses, on the other hand. Music lawyers, and Dom Rel (domestic relations) lawyers as we were taught to call them in New York, might have more common ground than they would initially think. But I actually find the case for having an AABM for band members or group members more compelling than the argument for having a pre-nup. A marriage should be a function of love. A band or group formation, on the other hand, and even the recording and distribution to record label A&R executives of a demo recording, from the music lawyer and entertainment attorney perspective, is often a commercial exercise - with perhaps some attendant art and love themes to it playing in the background. The shopping of one’s band’s demo CD to A&R executives at record labels is a commercial exercise and a business proposition. Group business initiatives should not be made absent prior clear written agreement between co-venturers.

Written agreements should be considered required for any collaborative commercial endeavor between two or more people, including demo-shopping and A&R inquiries to record labels – from the music lawyer’s perspective regarding bands and groups, from the entertainment attorney’s perspective regarding other artistic co-ventures, or from any lawyer’s perspective. One should use one’s discretion as to whether or not to skip the pre-nup. After all, the prospective spouse could get insulted, if he or she originally thought the other spouse was in it for love only. But from the music lawyer and entertainment attorney perspective, no band member should skip the AABM if the group member takes his or her band, group, or career seriously, or takes the A&R demo-shopping campaign to record labels seriously. And from the music lawyer and entertainment attorney perspective, no one band or group member should ask another to leap into a state of blind trust, in default of a good operative document – with respect to a record label A&R demo-shopping campaign, the signing of a contract, or otherwise.

If the band or group formation is not viewed as a commercial exercise, then I suppose the band members can simply agree on a handshake, and then gig for free in the subways. The band or group could also in theory strike a handshake deal as to who gets paid what in the event of an A&R record label demo-shopping success. However, as an entertainment attorney practicing in New York, the majority of bands or groups that I hear from, are concerned about their financial, as well as their artistic, futures. And the handshake deal between band or group members regarding performances or A&R record label demo-shopping may well what keeps legions of music lawyer and entertainment attorney litigators in business, arguing between themselves about things that have gone south.

Many musicians in bands and groups are trying to find a way to become economically self-sufficient on music alone, through A&R demo-shopping submissions to record labels or otherwise, while preparing to quit their “day jobs”. This result is not easy to achieve. And, this result is even harder to achieve without careful prior planning and drafting regarding the band or group as a commercial venture, through use of a music attorney or entertainment lawyer. An AABM is one music lawyer planning-tool which is essential for the band - and one which can also become virtually worthless if “left to a later day”. If the demo-shopping A&R record label response comes in as hoped, the group or band may be too busy and distracted dealing with Sony and Warner and the music lawyers, than to deal with each other at that point. And, as in the case of the pre-nup, later on down the road if things don’t work out, band or group members typically won’t sign post-honeymoon after the relationship has gone sour. Most music lawyer entertainment attorneys have seen numerous bands and groups break up. The time for the AABM is now not later.

No music lawyer, entertainment attorney, or anyone else wants to be required to negotiate and close the AABM once the band or group is already successful, or once the band or group has already been furnished with a proposed recording agreement as a result of demo-shopping or other A&R or record label project placement initiatives. The optimal time to close the AABM is to do so between the respective music lawyer or entertainment attorney counsel while the group or band is just being formed or while it is still struggling – and prior to the record label A&R work and demo-shopping. Period.

When business partners or stockholders agree amongst themselves in connection with a business formation, they do so in one or more signed writings. So, too, the music lawyer or entertainment attorney suggests, should it be with band and group members as well. A good AABM should be firm enough to recite the substance of the agreement between band or group members at the moment, but should also be flexible enough to contemplate future changes, such as changes in personnel and in artistic direction. A good AABM should provide guidance on the administration of the A&R record label demo-shopping initiative itself. Once in place with signatures and countersignatures, a music lawyer or entertainment attorney upon client instruction can amend the AABM to contour to the band’s or group’s developmental changes as they might materialize, including edits in response to record label A&R demo-shopping eventualities.

If every marriage were a true 50/50 proposition, I suppose that one could say that no pre-nuptial agreements would ever be needed. Similarly, if every business partnership were truly 50/50, maybe a written partnership agreement could be viewed by some as a waste of time. But the fact of the matter is, the percentages of investment and return are seldom exactly identical amongst all co-venturers. A music lawyer or entertainment attorney will opine that the same is true for bands and groups. Seldom, for example, does each band or group member bear an equal burden with respect to record label A&R project placement and demo-shopping work. And seldom, for example, do each of four band or group members actually write precisely 25% of each song, and even if so, how would you measure it and prove it? Word-count? Note-count? Beat-count?

In the average four-person band or group, each member may play a different instrument. Some may have been in the group or band longer than others. Some may be older and more experienced in the business of music. Some may have more experience with A&R executives, demo-shopping, and dealing with the record labels. Some may have, or think they have, “connections” to clubs and record labels, where other group or band members don’t. Some group or band members may have more free time to invest in the running of the band’s business such as the A&R and record label demo-shopping work, while others may be working two day jobs. Some group or band members may be able to afford to pay for the demo CD’s intended to be furnished to the A&R personnel and record labels. Others may not. Some group or band members may want to talk to a record label or music lawyer or entertainment attorney. Others may not.

And finally, perhaps most importantly, some band members may have more of a hand in the writing of the words or the music of the group’s original songs appearing on the demo CD’s intended to be heard by the record label A&R executives, than other band members. This potential disparity is probably the best reason for creating the AABM for the band or group as early as possible and prior to the demo-shopping record label A&R campaign, as a music lawyer or entertainment attorney will tell you.

A good AABM drafted by a music and entertainment attorney takes into account all of these types of factors, and more. Put conversely, if none of these band-related questions came up while one was putting together one’s AABM with one’s music lawyer or entertainment attorney, then the resulting document is probably not worth very much today for the purposes of keeping the group harmoniously together. An AABM is a forward-looking document wherein the music lawyer-draftsperson continually asks “What if...?” about multiple foreseeable band and group scenarios based upon past entertainment law experience, including the potential outcomes of an A&R record label demo-shopping submission campaign.

A music lawyer and entertainment attorney like myself will also tell you that the real value of a contract - any contract, including the AABM - is as a dispute-resolution and dispute-avoidance tool. In other words, the band or group members should tackle the likely-occurring and even possibly-occurring long-range events that might come up in the band’s lifetime, fight over and resolve them now, and then put the results on paper – with respect to the A&R record label demo-shopping submission campaign, and otherwise. Better to do it now, than pay music lawyer entertainment attorney litigators thousands upon thousands of dollars to do it in the courts or arbitration hearing rooms later, at dramatic expense to the band or group or its individual members.

Oftentimes, the music lawyer or entertainment attorney discovers, band or group members want to send out their demo’s to record label A&R executives but just “don’t want to think about” what would happen, for example, if the band’s bass player departs to raise kids in Maui, or if the group’s singer-songwriter front-man just up and leaves to join the Air Force. But if the other band or group members at all value their investment of time, sweat, energy, and money in the band including the demo-shopping record label A&R exercise, then they should know and have fully thought-through - in advance - the answers to these types of questions.

The music lawyer or entertainment attorney should be told these answers for the purposes of the drafting of the AABM. Who in the band or group owns and administrates the copyrights in the songs? Who in the band or group is responsible for storing the masters? Who in the band or group decides which A&R executives and record labels to contact during the demo-shopping exercise, and when? Who in the band or group decides what the demo intended for record label A&R personnel should sound like? Look like? Which band member or band members has/have final say in the hiring and firing of a manager? If the group breaks up, which member or members, if any, may keep using the band’s name, and who if anyone benefits from the past demo-shopping A&R record label inquiries if they happen to come to fruition after the break-up? And these are just some of the questions that should come up. There are many more, and part of the job and function of the music lawyer and entertainment lawyer is to come up with them in the first instance by way of prediction.

Every band’s situation is different, every group is different, and every record label A&R demo-shopping campaign is different. The lists of questions to contemplate and discuss with the music lawyer or entertainment attorney will therefore be as different as there are different band personalities, different group members, and different demo’s. It is true that the band should be better off, if a music lawyer or entertainment attorney prepares the AABM and then handles the A&R record label demo-shopping work. In a perfect world, all band or group members would be separately represented by a different music lawyer or entertainment attorney, and the resulting AABM document would therefore have more presumptive fairness than if but one band or group member had counsel. It is also true that while anyone can in theory try to submit a demo or soundtrack reel to a record label or elsewhere - a non-lawyer lay-person cannot practice music law, entertainment law, or any law or form of law for that matter, without a license in the United States.

But should all these considerations prevent a band or group from taking their first shot at creating a good AABM – particularly prior to the first demo-shopping A&R campaign initiated to record labels? Absolutely not. The band should at least try to resolve amongst its own members, the answers to all of the “what if” questions that will likely come up in the life-cycle of any band. The band or group can try to resolve these questions on paper. Thereafter when affordable, one of the band or group members may decide to consult with a music lawyer or entertainment attorney to review and revise the band’s starting-point document – and perhaps then enlist the same music attorney for the demo-shopping record label A&R inquiries as well. Typically, this inquiring group-member turns out in practice to be the band member with the most at stake in the outcome.

Conversely, the band members need to be aware that one entertainment attorney may well not be able or be allowed to represent all group members simultaneously, even in the context of demo-shopping record label A&R work, due to concerns regarding possible conflicts of interest - especially if different band members have different percentage investments at stake in the band’s commercial endeavors, but even if otherwise. The music lawyer entertainment attorney should speak to that issue as and when it comes up.

There should be plenty of time in the future for the band or group to consider the technicalities regarding rules of attorney-client music lawyer representation, and the question of “who represents who?”, although it is wise to tackle and conclude these analyses prior to any record label demo-shopping and A&R work being undertaken. And when the time for entertainment lawyer representation is right, these are serious threshold questions that should be taken seriously. Besides, no music lawyer, entertainment attorney, or other lawyer would take on a client for record label A&R demo-shopping work or other work, without first carefully evaluating these types of issues, as well as asking a lot of additional questions about band and group inter-relationships himself or herself on his or her own.

In the meantime, all bands and groups, whether on the cusp of their first demo-shopping or record label A&R campaign, or otherwise, should carefully deliberate upon the question of what written agreement should be drafted and negotiated amongst the band or group members, and how and when the music lawyer or entertainment attorney can be used to put the signed and countersigned document in place. Doing so now, in the present tense, could save a lot of heartache and expense down the road in the future, could enhance the demo-shopping A&R campaign to record labels, and could actually end up keeping the band or group together.

Click the “Articles” button at:

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My law practice as a music lawyer and entertainment attorney includes all transactional and advisory matters relating to groups and bands, including recording agreements, A&R (artist & repertoire) matters including demo project placement work or “demo-shopping”, publishing, copyright registration, licensing, distribution, and all other matters in the fields of video production, film, performances, touring, and entertainment generally. If you have questions about legal issues which affect your career, and require representation, please contact me:

Law Office of John J. Tormey III, Esq.

John J. Tormey III, PLLC

1324 Lexington Avenue, PMB 188

New York, NY  10128  USA

(212) 410-4142 (phone)

(212) 410-2380 (fax)

brightline@att.net

http://www.tormey.org/

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The Written Agreement Amongst Band Members

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