AFTER YOU CREATE AN ENTITY: THE “LOAN-OUT” & MUSIC PRODUCTION COMPANIES

 In Part 1, we explored the potential benefits an artist receives from establishing a business entity such as an LLC or corporation. We also discussed some other administrative matters related to the operation and continued maintenance of these entities.

In this installment, we move forward to discuss the next steps and possibilities after a musician creates such an entity, including utilizing this entity as a “loan-out” company and/or as a music production company. While every aspiring musician thinks of themselves as an entertainment or media mogul, the new business entity created by them is instrumental in creating the umbrella to make this vision a potential reality.

In order to build toward this dream, an artist can utilize their new entity in a variety of ways. The “loan-out” company (corporation/LLC) formed by the musician provides the musician’s services (recording, production, live performance) as an “employee” of the company to a third-party such as a record label, a music publishing company, a performance venue or a sponsoring brand. As the name indicates the entity “loans out” the services of the “employee” (musician) by contracting with another party (e.g., “record” label) instead of this party contracting directly with the entertainer.

Therefore, the loan-out company signs the agreement with the third-party and the company then “hires” the artist to do the job that it is contracted for. This gives the artist the added level of insulation and personal asset protection that an artist should desire and is inherent in these types of entities.

However, before the “loan-out” company is able to enter into agreements on behalf of the artist, the musician must first sign themselves to this entity. This means that the artist will actually be signing themselves to a recording, management and/or music publishing agreement with the entity they are an owner of.

Typically, these standard music industry agreements provide the loan-out company with the right to license the artist’s musical compositions and master recordings as well as the right to enter into subsequent recording, distribution, publishing or other music business arrangements with other companies, such as a recording label or music publishing company, for the distribution of the artist’s work and for the artist’s other related services.

As we have discussed, these “loan-out” companies also provide the artist with the ability to easily manage all of its intellectual property (i.e. trademarks, copyrights, sound recordings, audio-visual works, photographs, logos, websites) for licensing and distribution. The “loan-out” company is perfect to organize and utilize traditional “work-for-hire” arrangements and other rights assignment documentation to ensure that all the rights that any ancillary parties, such as studio mixers, studio engineers, photographs, videographers and third-party vocalists and producers, may possess are properly owned by the company for whatever purposes required.

This entity can also own and operate as an ASCAP, BMI and/or SESAC publishing company. This allows the entity to directly collect its public performance rights royalties as well as to administer or enter into co-publishing arrangements with other music publishing companies for the exploitation of the artist’s works. The entity is also used to easily collect and account for all of the artist’s SoundExchange and other royalties and related income.

While signing yourself to your self-managed company is one use, another important feature of the “loan-out” company is that it provides the artist with the flexibility to sign other artists to this entity. That allows an aspiring music mogul to create his own music production company and start to build his/her entertainment empire. This situation most frequently arises where a producer signs an artist he is producing for to his “own” label or production company.

This signing permits the owner to more easily manage, distribute and license the recording catalogue on behalf of the artists it produces. This also ensures that the production company receives just compensation by ordinarily facilitating all the third-party transactions through this entity. This could enable separate accounting and royalty portions distributed directly to the entity rather than to the artist who is then responsible for paying the producer his share of the royalties.

As with any corporate entity, more than one owner can possess an interest or shares of the created business. If there are multiple parties involved, it is prudent to get an agreement in place that outlines each party’s ownerships rights as well as management or other powers.

This agreement between the parties is crucial.

Corporations have shareholder agreements and LLCs have operating agreements. A unique situation may arise when a music business professional, such as a manager and an artist create an entertainment company together and sign the artist-owner as well as other artists.

It is prudent that each party have its own attorney to ensure all parties are adequately represented in this type of arrangement and that each party understands how this situation works. This often does not happen, especially due to financial considerations. If only one lawyer is used, care has to be taken as to the variations and decisions to be made.

While there is no guarantee of success, utilizing proper agreements and procedures are essential to achieve progress in the music business. As they say, this is a business and you need to run and treat it as such.

This article is not intended as legal advice, as an attorney and/or an accountant specializing in the field should be consulted.