Say you’re in a wicked neo-acoustic celtic post-rock band called Top Drawer (“TD”) with two friends. TD has played a few Canadian tours, self-released an LP, and was just signed to a Canadian indie with some clout. Financially, TD breaks even, but the horizon looks bright and you and your mates are in it for the long haul. Some bands you know have incorporated and you are unsure as to whether incorporation makes sense for TD. What to do?!
First, it is important to understand that, by default, the members of TD are currently partners in a partnership, whether you like it or not and regardless as to the existence of any written partnership agreement. That’s because the basic legal definition of “partnership” is a group of two or more people that have an agreement (perhaps established over beers!) to carry on a business together with a view to profit. TD may not think of itself as a profitable “business” at this point, but there is no doubt that TD is a business.
As partners, you and your friends are entitled to share in the profits of the band (e.g. 1/3 of the door money), and both the partnership AND each of you are individually liable (i.e. responsible at law) for any debts owed by the band (e.g. a producer’s flat fee) or for any damage or negligence caused by any of the partners in the course of doing business as the band. Put another way, each partner is an “agent” of the partnership and of the other partners and therefore the actions of one partner binds each of the other partners. I am sure you can see why being a partner in a band partnership has its risks (perhaps one of your band partners is a loose cannon when it comes to band funds, or routinely gets into shenanigans at venues or with fans).
If your band incorporates, a new and discrete legal entity is created (e.g. Top Drawer Inc.); typically all band members become equal shareholders where the power is evenly distributed throughout the band and the roles/responsibilities of each member are similar in weight and/or importance. The band will then contract for its services (e.g. booking shows with promoters) through the corporation. Corporations are legal “persons” in that they can enter into contracts, sue and be sued, own property, and acquire debt, and their shareholders, directors, officers etc. are generally not personally responsible for the corporation’s debts (i.e. the liability of such individuals is “limited”). For example, if Top Drawer Inc. takes out a loan from a bank to buy a tour van and later goes bankrupt before paying off the loan, the bank will likely not have any recourse against the individual band members. HOWEVER, note that banks often seek personal guarantees (i.e. a promise to repay, even if the business fails to repay) from band members and/or their parents even if the band is incorporated; if that’s the case, the band members would still be on the hook to repay the bank in the event the band incorporation goes belly up.
Beyond the limited liability perk of incorporating, incorporations are typically taxed at a lower rate than individuals, especially if the incorporation can take advantage of the federal small business deduction (the “SBD”). In all likelihood, your band incorporation will be eligible for the SBD.
Whether incorporating will provide a tax break for you and your band mates is a question best left for an entertainment industry accountant. There are many variables to take into account including how the corporation compensates the band members (as employees via a salary/wage/etc. versus as shareholders via dividends) and how much money the band generates annually. A savvy accountant will not only advise you as to whether incorporating makes financial sense for your band, but will also advise you on how to best keep track of band expenses to save you money come tax season.
Unsurprisingly, the incorporation process is not cheap. Your band will have to incur accountant fees, legal fees (to draft a minute book and incorporating documents), and government incorporation fees (currently $200 to incorporate federally and $360 to incorporate in Ontario) and the corporation must file annual tax returns. In that sense, if your band is just scraping by and your members still rely on day jobs to keep the lights on, incorporating may simply not be worth it for you in light of the associated costs.
In sum, there are certainly benefits to incorporating a band due to the limited liability of the corporation’s shareholders/directors/officers. However, whether incorporating makes sense for your band in regard to the tax implications is a nuanced question that will require you to consult with an accountant and thoughtfully analyze your current and projected financial situations. Ask around in the music scene for a reliable accountant with music biz XP points; you won’t regret it!