A client recently asked me to prepare a cease and desist letter to be sent to his former band members. He was less concerned about the physical assets of the band but more about the intangible assets – the intellectual property – of the band. He was so much into the creative process when the band was formed and never paid attention to the business and legal sides of things. The band only had a two-page partnership agreement with little or nothing protecting him but now he has to go through the painful process of breaking off with his former band members while scrambling to retain control of rights in his contributions to the band’s intellectual property.
The provisions contained in a recording contract with a solo artist will very much apply to the band but instead of having just one artist, there are multiple artists in such contract. Ordinarily, the relationship of the band and the recording label for the exploitation of the band’s mechanical right, or the publishing company for the exploitation of the publishing right, will be governed by the recording agreement and publishing agreement, respectively. Such agreements, depending on how sophisticated the record label or publishing company is, will most likely make provisions applying to the band break up. For example, the agreement may provide for the “key member” concept whereby the withdrawal from the band by the lead artist may lead to the band’s breakup and the end of the recording contract. This may not apply if the drummer or the pianist leaves the group. However, the internal structure of the band as to who gets what share of the royalties or what happens when the band actually breaks up, among others, are often left to the band to determine.
The most important thing to note is that even though the band might have gotten together solely for creative purposes, it is still a business in the eyes of the law. That’s why it’s a “show business”. If there is no proper structure as to the kind of entity formed, the law will infer a partnership even if that is not the intent of the band members. Section 202 (a) of the Revised Uniform Partnership Act (See Section 16101 (9) of the California Corporations Code) defines partnership as “an association of two or more persons to carry on as co-owners a business for profit…” But partnership may sometimes not be the appropriate entity for band members given the partners’ unlimited liability, whereby third parties can attach not just the partnership’s assets but the partners’ assets. Things are a bit different for “limited partnership” where there is one general partner and other limited partners. In this situation, the general partner has unlimited liability and oftentimes it is a corporation which provides limited liability to its shareholders, while the other partner’s liabilities are limited to the amount of their contributions. Since members of a band are natural persons, they will very likely be treated as a “general partnership”.
A better way of ensuring that members are protected against liability and ensuring that their assets are properly held in an entity is to form a corporation or limited liability company (“LLC”). A corporation and a LLC are formed upon filing the necessary document, usually an article of incorporation or organization with the secretary of state. The benefit of forming a corporation or LLC is the limited liability protection it affords its members as their liability is limited to the amount of their contributions to the entity. The other benefit that LLC has over a corporation applies to taxation. As a corporation, its income is taxed at the source and if it makes distribution or pays dividend to its shareholders, the latter also gets taxed thus creating a double taxation scenario. For LLC, there is a pass-through taxation whereby the members of the LLC are taxed on their income drawn from the LLC.
Why create an entity and structure the relationship of band members before a break up happens? Each of the entities discussed above has an agreement which guides the operation of the entity and the relationship of its members. For a partnership, there is a Partnership Agreement. For the corporation, there is a Bylaw and for the LLC, there is an Operating Agreement. Through this agreement, the members are able to determine how their assets and liabilities, operation of the band, its intellectual property rights covering the mechanical, publishing, synchronization, public performance, merchandising, the name, trade name and trademark and right of publicity of each band member will be exploited and how much percentage or interest in the company each member has. The agreement will also provide for the control of the band. Will it be a “majority control” or control by whoever started the band? Will the entity (i.e. the band) continue to exist after a member withdraws from it? Will this lead to dissolution? Can the remaining band members continue the business? How does the band buy out the withdrawing member? Will the buyout apply only to tangible assets? How does the band value those assets? What about the intangible assets like intellectual property? What will happen to the band’s name (which may be its most valuable asset)? Does the withdrawing band member continue to get royalties on licenses of the band’s assets before his/her withdrawal? Does s/he continue to get royalties on merchandising using the band’s name?
These and many issues are what the band members should consider before setting up the band. The band will need an entertainment attorney who understands the issues in the music business in setting up the entity and provides ways of handling them in the organization document. It is advisable that the band consult an attorney not because members anticipate a break up but to cater for it in case it happens.