Music Biz: Forming a Partnership for a Band

WHAT IS A PARTNERSHIP?

A partnership, otherwise known as a general partnership, is an association of 2 or more persons for the purpose of acting as co-owners of a business for profit.

IS PARTNERSHIP THE ONLY CHOICE?

A general partnership is the simplest form of business entity between 2 or more persons.  In fact, there is no requirement in most states that the partners sign a written partnership agreement.

However, it is a good idea to prepare and sign a written partnership agreement (as prepared by an attorney experienced in the music industry) in order to avoid any misunderstandings at a later time, such as when you are in the middle of a 10 month tour in support of your first album under your major label recording agreement.

After the band has begun to earn significant income, the bands' legal and tax advisers might advise the formation of other business entities such as a limited liability company (LLC) or a corporation to handle some aspects of the band’s business.

IS IT NECESSARY TO FILE ANY DOCUMENTS WITH FEDERAL, STATE OR LOCAL GOVERNMENTS?

The partnership is usually required to register the partnership's name and existence with the proper governmental offices in the county where the band primarily conducts its business.  Other business license and tax issues vary depending upon local laws.  A federal tax identification number is typically required in order to establish a bank account for the partnership.

WHAT IS THE PURPOSE OF THE PARTNERSHIP?

The partnership can be formed for any legal purpose, and it is not necessary to state a specific purpose.

However, for purposes of clarity it is a good idea to state that the partnership is formed, for example, for the purposes of making personal appearances and exploiting recordings, the group name, and the names, likenesses and biographical materials of each member as members of the group.

WHAT ABOUT PUBLISHING?

Publishing rights are typically the wildcard in the band partnership, and ownership depends on who writes the songs. 

If all of the band members contribute to the songwriting in a more or less equal manner, it is possible to include publishing activities and revenues in the partnership entity.  However, if one or two band members compose a disproportionate amount of the songs, it can get complicated.

In that case, it is often agreed agreed that the copyrighting and exploiting of original musical compositions composed by any partner individually or jointly with any other person shall not be within the scope of the partnership agreement, and a separate business entity may be established to administer the publishing.

HOW LONG DOES A PARTNERSHIP LAST?

Usually the agreement will set forth the events or circumstances that will terminate the partnership agreement. For example, these might include: a) the written agreement of all of the partners to dissolve the partnership; or b) the death of a partner.  However, the partners can elect to continue after the death of a partner, if the agreement provides for that.

HOW DOES THE PARTNERSHIP MAKE DECISIONS?

In many cases the partnership agreement states that each partner shall have the right to participate equally in the control, management and direction of the partnership business and that a majority vote of the Partners will be required to adopt any partnership decision. 

However, other management structures are possible.  For example, it is possible to designate one partner as “managing partner” or to require a unanimous vote for some or all decisions.

In fact, because general partners share the liability as well as the profits of the partnership, it is usually a good idea to require a unanimous vote before any partner is allowed to:

• sell, assign or encumber his interest in the partnership
• lend any Partnership funds
• incur any debt or obligation in the name of or on the credit of the Partnership
• execute any guarantee on behalf of the Partnership
• release, assign or transfer a Partnership claim or any asset of the Partnership
• borrow in the name of the Partnership or
• invest Partnership funds or other assets.

HOW ARE THE PARTNERSHIPS EARNINGS SHARED?

The partnership’s profits are usually apportioned pro rata among the partners according to each partner's interest.  This means that the partners will split revenues equally unless the agreement provides otherwise.

WHAT HAPPENS IF ONE MEMBER LEAVES THE BAND?

In the event that any partner voluntarily withdraws from the partnership, the partnership agreement can provide that the withdrawing partner must sell his or her interest back to the partnership as of the date of withdrawal.

The specific method for computing the purchase price should be set forth in the agreement. 

However, in most circumstances, even a partner dies, leaves or gets kicked out, the partnership continues to pay that former partner or their estate, their share of income from ongoing exploitation of:

1.  master recordings containing the performances of the former partner, and
2.  merchandise depicting the name, photograph, likeness or graphical material of the former partner.

WHAT ABOUT ADDING NEW MEMBERS?

The agreement could state that the partnership may admit additional partners upon the unanimous vote of the partnership.  A new partner should be made subject to the existing partnership agreement or an amended agreement.  In many cases, the new partner has no acquired interest in the group name apart from the limited right to be known as a member of the group.

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