Published Sep 17, 2007There are those of us (LLBs, CAs and other sad sacks with compulsive tidying disorders) who truly relish the chance to put the paperwork in order. But while Excel worksheets and serialised file labels may give us a special thrill, the fact is that the other 99.7 percent of musicians filing systems consist of six years worth of coffee-stained gas receipts crammed into the glove box of the van. These same people are cool with handshake deals, because dude, the paperwork is a pain in the ass and hey, its not like anyone in the music business would ever exploit a musician, right?
Uh, wrong. People, this is no way to get ahead. Clutter and confusion do not beget success, only more clutter and confusion. So if you want to be taken seriously in the music business, you need to take the business of music seriously, beginning by starting and administering your own business. So what kind of business? There are several formal business structures to choose from, and each one has different purposes, administrations and tax implications. Which one you choose depends on what you need the business to do, modified by your goals and capabilities. Having a business will (hopefully) kick your brain into business gear; youll save taxes, and registering a business may also allow to apply for some kinds of business grants. It legitimises what you do as a musician. Registering a business is a powerful indication that you intend your musical activities to be considered a business and not just a hobby (see Meet and Greet). Having a business means business.
The three basic business structures are: sole proprietorships, partnerships, and incorporated companies.
Anyone can be a sole proprietor. Its really a fancy way of saying "self employed. A sole proprietorship is an unincorporated business owned and managed by one individual. The owner is considered self-employed and reports the business income on a T1 Individual Income Tax Return. Sole proprietors can charge legitimate business expenses against revenue meaning that if you report revenue from being a musician, you can deduct the costs, like guitar strings, or gas for the van. Sole proprietorships arent difficult to set up and because they are a "personal business, you only have to report income annually. On the downside, income from a sole proprietorship accrues to your personal income, so the tax margin can be as high as your personal income tax level; and because you are the sole owner, you remain personally liable for the debts and liabilities of your business. Sole proprietors earning in excess of $30,000 per annum in gross revenue from the business must charge and report GST.
Registering and operating a sole proprietorship is a good way to gain administrative experience and is much less costly than an incorporated company. Its a structure than can work really well for solo acts, as well as for bands where one person writes the songs and/or takes care of most of the business. The bandleader hires the rest of the band, and the costs associated with their engagement (such as per diems, or shares of income from gigs, or equipment if the band leader pays for it and keeps receipts) is deductible against the bandleaders personal income (provided that she reports the bands revenue as well). Note that in this scenario, each band member is responsible to Revenue Canada for reporting any money they got paid by the bandleader.
Partnerships can take a couple of different shapes, but the basic idea is that a partnership will suit two or more people who intend to share everything (both risk and benefit) in the business. Youll need to set up a partnership agreement that outlines who the partners are and what the objectives of the business are. In a general partnership, the business is owned and managed by all the partners equally. Look out, for in this type of arrangement, each partner is liable for all the other partners, meaning that if one partner screws up, the other partners may end up on the hook. (In a limited liability partnership or LLP, some partners give up management responsibility in exchange for limited liability.) Each partner is considered self-employed and must report business income on her personal tax return. The partnership is expected to charge and report GST on its earnings, and each partner who draws more than $30,000 per annum from the partnership must charge and report GST on revenue from the business. Partnership arrangements may not be ideal for bands, because they can be restrictive on who comes and goes in the band, or on who owns what, and if you want all of that to be spelled out clearly, youd best hire a lawyer to draft all your agreements.
Incorporated companies (corporations) are radically different from other business structures in that a corporation is a separate legal entity from its shareholders/owners. Shares in a corporation can be owned by one person, a number of people, and/or by other companies. Corporations can be registered provincially or federally theres not a huge difference in what that means but federally incorporated companies can do business anywhere in the country without much aggro, whereas provincially registered companies are sometimes limited in their movements and transactions across provincial lines. Corporations are treated as individual persons under the law, which makes it hard for debtors or people wanting to sue you to get at your personal assets to satisfy a debt of the company. Because of their individual legal status, corporations are expensive to set up you can DIY, using guides you can get at the library or online, for around $500. If you feel you want some help (and you probably do!), there are online companies that will do the basics for about $400 including a GST account. The best option is to hire a lawyer who will draft and file all the paperwork, and explain it to you while its happening. ($800 is a bargain basement price for this service.) Beyond the initial registration, there are annual agents fees and registration renewal fees of around $250 or more. Corporations pay a lower marginal tax rate than most individual people do, and are frequently eligible for grants and loans that individual people arent. Beware that if you draw personal revenue from the corporation, it becomes taxable income to you personally. Corporations must charge and report GST regardless of gross revenues, and any person who draws income from the company may have to charge the company GST. Also, corporations must have their own bank accounts; naturally, banks charge higher fees for corporate bank accounts. On the plus side, the bank fees are a deductible expense and around we go!
Corporations are complex entities and there is an un-dodge-able degree of paperwork and administration that goes along with owning a company. Still, the corporation is in many ways the most steadfast yet flexible business structure for musicians: shares can be reassigned or sold; the corporation can "own all the assets of the band thus providing a degree of security and permanence to what the band does.
Whatever structure you choose, you can and should deduct all of your legitimate expenses against your business income. From this moment forward (if you dont already do so) keep receipts of everything you spend on your music career. This includes guitar strings, gas, rehearsal space, per diems for the band, lunch on the road. Give out receipts or use invoices when you get paid. If you administer the business from home, or if you write songs or practise in the basement, you may be able to claim "home office expenses so keep all your phone, internet, heat, lights, water and rent receipts so that your all squared when tax time rolls around. The more organized you are, the more painless and profitable your business becomes. For more on income tax, see Martin Turennes 2005 Music School piece on "How to File Your Taxes at