Forming a Small Music Business: 
The Who Meets the Whys and the Wherefores

Copyright 2001 by James W. Martin, P.A.
St. Petersburg, Florida
All rights reserved

Presented at "Does Size Matter?  Representing the New Breed of Independent Labels",
Florida Bar Entertainment, Arts & Sports Law Section Annual Retreat Seminar
May 27, 2001

Published in The Practical Lawyer, American Law Institute-American Bar Association (ALI-ABA), March 2002

Note: This article is for background purposes only and is not intended as legal advice.

Remember the Who?  Remember when they were young?  Well, I do.  That's when I had my first music client.  It was a local band that could cover the Who, the Beatles, the Stones, and myriad other rock bands so well you'd think they were from England.  They were good, they were young, they were energetic and they thought they would be the hottest new band by the time the sun came up tomorrow. But they never made it.  Less than a month after I met with them, they split up, never to be seen or heard from again.  And they didn't pay my bill.

That's a lesson a first-year lawyer never forgets.  Music is a volatile business; choose your clients carefully.  Just because they sound like they're on the radio doesn't mean they are or ever will be.  So I spent the next 25 years of my law practice developing a more analytical approach to advising clients about the legal side of forming a small business, whether it's an art museum, a jewelry store, a contractor, an artist, or a record company.  Here;s what it boils down to:

The Who

These are questions you need to answer in your first meeting:

1.         Who's your client?
            Avoid multiple clients.
            Is it an entity or an individual?
            Is it the one paying you?
            Do a conflicts check.
            Prepare an engagement letter (see http://www.jamesmartinpa.com/lttr_eng.htm ).

2.         Who's not your client?
            Tell them.  Put it in writing.

3.         Who's putting in money?
            Will they be directors, officers, managers, employees active in the business?
            Will they be passive?

4.         Who's putting in services?
            Will they be paid compensation as employees or be paid stock for services?
            Have they considered the tax effect of this?

5.         Who's putting in intellectual property?
            What exactly is it?
            Do they own it?
            Is it registered or registrable?

6.         Who's the lender?
            Is it a bank?
            Is it really an investor disguised as a lender (see securities laws)?
            What is the loan collateral?

7.         Who's the customer?
            Is it a business (wholesale) or consumer (retail)?
            Where is it located?
            How many are there?

8.         Who's the employees?
            Are they the same as the owners?
            Are they the same as the managers?
            Do they have jobs now?
            Do their present employers know (trade secret, noncompete, breach of loyalty issues)?

The Whys

These are further questions you need to answer before you get too far into the work:

1.         Why has your client come to you?
            What exactly does your client see as your role?
            What does your client not see as your role?
            Do you agree?

2.         Why will the owners invest?
            What’s in it for them? Income? Growth? Fame? Celebrity? Glamour? Family? Enjoyment?

3.         Why will the lenders lend?
            Is there income to pay the loan payments?
            Are there assets to use as collateral?
            Is the business plan sound?

4.         Why will the customers buy?
            Is there competition?
            Is your client’s price lower?
            Is your client’s product better?
            Is what your client’s doing different legal?

5.         Why can they make a profit?
            Will their income exceed their expenses?
            When and for how long?
            How much working capital do they have?
            How long will it take to break even?

6.         Why all this now and not before or later?
            Have they done this before?
            If so, what happened?
            If not, why not?
            Can this be done better later?

The Wherefores

These are what you do with the answers to the above questions (these are summarized in Appendix 6 - New Entity Checklist):

1.         Diagram:  Draw a diagram and fill in what you know.
            Use Appendix 1 - Business Entity Diagram.
            Do this in the first meeting with the client.
            Use it as a graphical outline of points to discuss.
            Your client can point to it and tell you who’s doing what and why.

2.         Entity:  Choose the simplest entity that works.
            Corporations are still the simplest entity that limit liability.
            Florida has 646,000 active corporations and just 42,000 active limited liability companies. (see Appendix 2 - Florida Division of Corporations Annual Filings and Active Entities).
            Half of those LLCs were formed last year.
            So LLCs are hot right now, but they are not treated the same in all 50 states and have little in the way of case law.  Much commentary has been written about them, including whether the concept of piercing the corporate veil should apply to LLCs.  (The consensus is that it should.)
            General partnerships and limited partnerships can also limit liability now (see Appendix 3 - Common Legal Entities in Florida).
            Note:  In 1982 Florida had more entities on file than any other state in the U.S., even more than the countries of Canada and Mexico; it was the most active jurisdiction for filings in North America.  Appendix 2 shows nothing has changed but the size of the numbers.

3.         CPA:  Bring in a CPA and defer tax, business plan and accounting matters to the CPA.
            Choosing an entity other than a corporation should be based on tax factors per CPA advice (see Appendix 4 - Financial Statements - Simplified - Any Entity).
            CPA should apply for tax ID number and elect S (if corporation is to be S corp). 
            CPA should review business plan.
            CPA should set up accounting system customized to that business.
            CPA should prepare or review state and federal income tax returns, employment tax returns, sales tax returns, ad valorem tangible personal property tax returns, and intangible personal property tax returns.

 4.         Securities:  Bring in a securities lawyer if there is an investment.
An investment is a security, whether it's called stock, share, partnership interest, membership, or nothing at all.
Even a note (loan) can be a security if sold as an investment.
Securities must be registered under state and federal laws before being offered or sold.
Registration is very expensive.
Most small businesses can fall within an exemption from registration IF detailed documentation and other requirements are followed.
Securities lawyers know the details that must be followed; most lawyers do not.
Securities laws have both civil and criminal penalties.

5.         Owners Agreement:  Discuss provisions for shareholder agreements, partnership agreements, and LLC operating agreements.
Partnerships need partnership agreements, and limited liability companies need operating agreements.
Corporations do not need shareholder agreements, but they are a good way for shareholders to set forth basic agreements such as the right to be elected a director, receive equal compensation, etc.
The drafting that goes into an agreement is what makes partnerships and LLCs more expensive than corporations.
A well-drawn agreement will reflect the actual understanding of the parties, so it needs to be discussed and reviewed with them.

 6.         Employment Agreement:
A.         Discuss and prepare employment agreements for key employees.
B.         Discuss and prepare confidentiality and noncompete agreements.

7.         Intellectual Property:
            A.         Consider trademark registrability when choosing a name and logo.
           B.         Explain trademark laws in general and use of common law and federal registered trademark symbols.
            C.         Explain copyright law in general and use of whether or not registered.
            D.         Discuss signs, letterhead and business cards.
            E.         Discuss Web site domain name, copyright and trademark issues.
            F.         Explain need for work for hire and assignment of copyright agreements with independent contractors.

 8.         Fictitious Name:  Discuss registration in applicable jurisdictions if not use exact name including Inc., LLC, LLP, LLLP.
            Florida requires registration of fictitious name with Secretary of State if vary from actual name in any way.
            Some states refer to this as assumed names.
            Registrants would no longer need to publish the fictitious name in newspaper if the Governor signs HB 1157 adopted by the 2001 Florida Legislature.  The new law would allow the Department of State to waive the publication requirement if the Department indexes the fictitious name registration in a central database available to the public on the Internet.

9.         Jurisdictions:  Qualify entity in other states and countries where business will be done.
            What is doing business is a question of state law and varies from state to state.
           Generally having an office or agent in that state triggers a requirement to qualify with that state's Secretary of State.
           For information on qualifying in all 50 states, including forms, seewww.governmentfilesonline.com.

10.        Real Estate:  Review leases and real estate purchases.

11.        Equipment:  Review major equipment purchases and leases.

12.        Insurance:  Bring in an insurance agent and discuss coverage limits and exclusions.
            Coverages to discuss:  
            Business owners package.
            Property: fire & all risks, flood, plate glass, valuable records, electronic data processing, property of others, transit, foreign.
            Liability: general, products, overseas, foreign, worldwide, environmental, professional (errors & omissions), owned & non-owned vehicle, umbrella (excess).
            Employees: workers comp, employee group medical, employee group disability, employee dishonesty, key person life, key person disability.
            Special:  Performance and payment bonds, events.

13.        Licenses:  Discuss city, county, state and federal licenses required or desired.
            Consider local occupational licenses and zoning, including noise ordinances and home occupations.

14.        Suppliers:  Discuss and review or prepare contracts and relationships with major suppliers.

15.        Banks:  Discuss bank accounts, FDIC coverage, sweep accounts, safe deposit boxes, authorized signers, etc.

16.        Goods & Services Contracts:  Discuss, prepare and review contracts for the specific goods and services the entity will produce.
This is the primary work that you will do after the entity is formed.
Your work will include drafting form contracts, negotiating deals and preparing deal contracts.

17.        Signing Contracts:  Discuss the proper way to sign contracts to avoid personal liability.
            To avoid liability, be sure to use the words "By" and "as":

                        ABC, Inc., a Florida corporation

                        By:____________________________
                                    John Doe, as its President

18.        UBR:  Discuss filing Uniform Business Report (annual reports) in applicable jurisdictions.
            Failure to file may result in personal liability.

19.        Meetings:  Discuss formalities to be followed such as minutes and meetings.

20.        CYA:  Confirm all of the above in written letters to client, CPA, insurance agent and others; copy your client on all correspondence.

Conclusion

That's it.  Ask 8 Whos and 6 Whys and then do 20 Wherefores. The music gods will surely bless you and your client, even if the music stores don't.

About the Author
James W. Martin (Stetson Univ., BS Math 1971, JD 1974) practices corporate, real estate & estate planning law in St. Petersburg, Florida, for business and nonprofit clients including the Salvador Dali Museum. He has written forms books for West Publishing (business organizations, nonprofit corporations, real estate transactions, specialized forms) and has spoken numerous times at the Fla. Bar Convention seminars on contract drafting. His article "50 Tips for Writing the Contract That Stays Out of Court" was published by ALI-ABA and The Florida Bar in 1997, 1998 and 2000 and has been reproduced in textbooks. Additional articles appear on his Web site at www.jamesmartinpa.com .  

GovernmentFilesOnline.com was also established by Florida lawyer James W. Martin.