One of the decisions needed to be made by those seeking to make music their career is what form of business their aspirations will take. The business that is begun usually is structured in one of three ways—Sole Proprietorship, Partnership, or Corporation.

Sole Proprietorship—this is the simplest form of business to organize, for it involves only one person. Starting a Sole Proprietorship involves filing paperwork with your local or county government for “Doing Business As” (DBA) an assumed name. The business the person forms could be a production company, management operation, recording studio, or singer. Filing fees, of course, vary by locale, but the fees are usually less than $100. One of the steps involved in filing for a Sole Proprietorship—especially if the person is planning to use a name other than their birth name to identify them as distinct from anyone else operating a similar business or service, such as a fictional word like Carrot Top—is searching through the records or database at the local or county government’s office for names which may conflict with the one proposed. If all is well, the local or county government issues a certificate that the applicant can take to the bank to establish a checking account.

A Sole Proprietorship, however, has its advantages and disadvantages in business. One of the main advantages is that it takes very little money to form one and there is very little by way of governmental rules or regulation concerning its structure. This fact allows the owner of the business a direct hand in controlling the fate of the company. Another advantage is that no separate income tax returns are necessary; the personal 1040 forms used by the owner will suffice. The most important advantage a Sole Proprietorship yields is that all profits the company takes in are available to the owner 100%.

The disadvantages of being a Sole Proprietorship start first with the fact that the company’s liabilities are the personal responsibility of the owner. The owner is held accountable for any and everything which may happen legally to the business. This could jeopardize the personal assets of the owner—such as real estate, bank accounts, and college funds—if a lawsuit was filed against the business. Another disadvantage is that there could be difficulty in raising money to fund the new business since the personal credit rating of the owner is what is being evaluated by a lending institution. Also, fewer tax advantages are available to a Sole Proprietorship as are with the other business structures. Finally, with a Sole Proprietorship when the owner dies, the business dies also. There is no continuation of the business and it cannot be left to heirs. Even if, for example, someone left the physical building and equipment of a recording studio to their heirs and the heirs continued operating the studio, in the eyes of the law it is a new business.

Partnership—a Partnership happens when two or more people get together and go into business. This business can be a singing group, management company, record label, etc. As with a Sole Proprietorship, a Partnership is relatively easy to form, requiring again the necessary paperwork being filed with the local or county government and a data search to determine if any other company, business, or firm is operating with a name similar to the one proposed.

The advantages of a Partnership are that there are additional means to raise money for the business since there is more than one person’s credit rating to use when approaching banks. There is also little outside regulation of the business, and the decision-making of the business can be spread out among all the partners. Likewise, all the partners involved in the business bring to the company skills which hopefully can be used in making the business prosper. There are also certain tax advantages a Partnership may enjoy as well.

On the downside, a Partnership also has unlimited personal liability for all the partners involved. If a lawsuit threatens to bankrupt the business, it could also bankrupt the personal finances of the partners. Just like with a Sole Proprietorship, there is no distinction between the business and the persons running it. There is also the fact that the old adage, “too many cooks will spoil the soup” will make itself known in that EVERY partner involved in the business may have their own opinion as to what is best for the company. This usually results in trouble with a big “T”. And to add to the drama, there may well be a problem in finding people with whom others are compatible with. Finding a partner to go into business with is often fraught with peril, starting first with clashing personalities and/or egos.

And just like with a Sole Proprietorship, when one or all partners dies, the business also dies.

Corporation—a Corporation is the more involved of the three as it relates to formation and regulation. A Corporation requires governmental involvement at the state level, and usually is a cumbersome process. This process may involve extensive record keeping as well as detailed financial statements, IRS forms, etc. Each state may have different requirements so research in that area is highly advised.

The main advantage of a Corporation is that it shields the principles from personal liability. In the event of a lawsuit or other potentially devastating financial occurrences like a bankruptcy, a corporation acts as a buffer between the company and the individuals who comprise that company. A lawsuit or bankruptcy would therefore be limited in its reach to only the assets of the company and cannot touch the personal accounts or assets of the members of that company.

A Corporation can also be transferred to other people once the founder dies, and money to invest in the company is easier to raise. There are also certain tax advantages for becoming a corporation.

As with any other facet of business, please seek professional advice as to which form of organization is best for you.