Should I Start an LLC for My Record Label?

Starting a limited liability company (LLC) for your record label can provide several benefits.

Most importantly, an LLC structure offers limited liability to its owners, which can protect their personal assets from lawsuits and creditors.

For a record label, lawsuits can arise from things like failing to appropriately credit an artist on their album or releasing a track that is too similar to an existing song.

LLCs are also affordable, highly flexible (from a tax point-of-view), and can make your record label seem more credible.

Recommended: Use Northwest to form an LLC for $29 (plus state fees).

Do I Need an LLC for a Record Label?

LLCs are a simple and inexpensive way to protect your personal assets and save money on taxes.

You should start an LLC when there's any risk involved in your business and/or when your business could benefit from tax options and increased credibility.

LLC Benefits for a Record Label

By starting an LLC for your record label, you can:

Protect your savings, car, and house with limited liability protection
Have more tax benefits and options
Increase your business’s credibility

Limited Liability Protection

LLCs provide limited liability protection. This means your personal assets (e.g., car, house, bank account) are protected in the event your business is sued or if it defaults on a debt.

Record labels will benefit from liability protection because of the risk of trademark infringement that comes along with releasing commercial music or other forms of audio. Record labels also face other general business risks, such as workplace accidents and financial data breaches.

Example 1: Your record label is sued for copyright. Suppose the court finds you guilty and orders you to pay a huge fine. In that case, limited liability protection will ensure that the payment will only affect your commercial assets, not your personal finances.

Example 2: Someone sues your record label because you didn't credit him appropriately on his album. In the event of a guilty verdict, being an LLC will protect your private assets and limit the effect of the incident to only your business assets.

Example 3: You borrowed money to grow your record label but ran into financial trouble and are now unable to repay the loan. If you set up your record label as an LLC, creditors will be unable to seize your personal property provided you did not guarantee the loan personally.

An LLC will also protect your personal assets in the event of commercial bankruptcy or loan default.

To maintain your LLC's limited liability protection, you must maintain your LLC's corporate veil.

LLC Tax Benefits and Options for a Record Label

LLCs, by default, are taxed as a pass-through entity, just like a sole proprietorship or partnership. This means that the business's net income passes through to the owner's individual tax return.

The business’s net income is then subject to income taxes (based on the owner's tax bracket) and self-employment taxes.

Sole proprietorships and partnerships are taxed in a similar way to LLCs, but they do not offer limited liability protection or other tax options.

S Corp Option for LLCs

An S corporation (S corp) is an IRS tax status that an LLC can elect. S corp status allows business owners to be treated as employees of the business (for tax purposes).

S corp tax status can reduce self-employment taxes and will allow business owners to contribute pre-tax dollars to 401k or health insurance premiums.

The S corp status requires that the business pay the employee-owner(s) a reasonable salary for the work they perform.

In addition, the business might need to spend more on accounting, bookkeeping, and payroll services. To offset these costs, you'd need to be saving about $2,000 a year on taxes.

We estimate that if a record label owner can pay themselves a reasonable salary and at least $10,000 in distributions each year, they could benefit from S corp status.

You can start an S corp when you form your LLC. Our How to Start an S Corp guide will lead you through the process.

Credibility and Consumer Trust

Record labels rely on consumer trust. Credibility plays a key role in creating and maintaining any business.

Businesses gain consumer trust simply by forming an LLC.

A growing business can also benefit from the credibility of an LLC when applying for small business loans, grants, and credit.

Northwest will start an LLC for you for just $29 (plus state fees).

Get Started

How to Form an LLC

Forming an LLC is easy. There are two options for forming your LLC:

You can hire a professional LLC formation service to set up your LLC for a small fee
Or, you can choose your state from the list below to start an LLC yourself

Select Your State

For most new business owners, the best state to form an LLC in is the state where you live and where you plan to conduct your business.

Do LLCs Need Insurance?

All businesses need insurance to protect their business assets — even LLCs. This is because the limited liability protection from an LLC protects your personal assets, not your business assets.

Record labels, which typically work with original creative content, need insurance for the label's financial security in the event of a work-related mishap, such as digital piracy or plagiarism.

Common Situations Business Insurance May Cover for a Record Label

Example 1: During an artist’s initial launch, your label promises a discount on their next release to anyone who preorders the first album. Because that album sells poorly, your label never releases a second one. If the people who preordered the first album file a false advertising lawsuit, general liability insurance would cover your legal fees and any damages awarded in a settlement.

Example 2: An agent slips on a wet floor in your office and injures themselves. General liability insurance would cover the agent’s medical bills related to the accident.

Example 3: When an employee makes false claims about a competitor and several media outlets publish those statements, the competitor files a defamation lawsuit against your label. General liability insurance would cover your legal fees and any damages awarded in a settlement.

Other Types of Coverage Record Labels Need

While general liability is the most important type of insurance to have, there are several other forms of coverage you should be aware of. Below are some other types of insurance all record labels should obtain:

Product Liability Insurance

When you sell products to the public, there’s always a chance a customer may file a lawsuit if they believe one of your products caused significant harm—such as if a child suffers internal bleeding after ingesting pieces of a shattered CD. Product liability insurance would protect your business by covering your legal fees and any damages awarded in a settlement.

Professional Liability Insurance

Professional liability insurance covers work-related errors, including those associated with copyright infringement. If someone accuses your label of plagiarizing a previously published song, this coverage would pay for your legal fees as well as any damages awarded in a settlement.

Workers’ Compensation Insurance

Most states require businesses to carry workers’ compensation insurance for their part-time and full-time employees. This coverage protects your employees if they become injured at work or fall ill after a work-related accident. It not only covers an employee’s medical bills and lost wages if they need time to recover but also any disability benefits stemming from a work-related accident.

For your performing employees, such as singers and musicians, make sure you understand how your policy covers voice, hearing, and repetitive-motion issues they may suffer, as coverage often depends on the performer’s relationship with your company and how the issues develop.

Commercial Property Insurance

If your record label owns an office or recording studio, you’re responsible for all business-related property housed there in the event of a fire, burglary, or natural disaster. Commercial property insurance would cover the cost of repairing or replacing your recording equipment, computers, and other business property after an accident so you can recover quickly.

Commercial Umbrella Insurance

While your general liability insurance policy covers most claims, some accidents or lawsuits may be so catastrophic that they exceed the limits of your primary coverage—such as a copyright infringement claim on one of your most successful albums. Commercial umbrella insurance protects you from paying out-of-pocket for any legal fees and awarded damages that exceed your primary policy.

Should I Start an LLC FAQ

Choosing the right business structure depends on your business’s unique circumstances and needs. However, unless your business is very low risk (like a hobby), an LLC is likely the better option.

Visit our LLC vs. Sole Proprietorship guide to learn more.

At a minimum, you’ll need general liability insurance and professional liability insurance.

Read our Business Insurance for Record Labels article for more info.

The average cost to launch a record label is about $15,000, though this can vary widely from location to location. This budget includes audio and video recording, editing, graphic design, promotion, and legal representation.

Visit our How to Start a Record Label guide to learn more about the costs of starting and maintaining this business.

One of the biggest operating expenses for a record label is recording costs. Other expenses include the cost of pressing physical copies of albums, graphic design, and promotional costs.

Learn more about running a record label.

Record labels make money by selling physical and digital copies of songs and albums as well as from things like band merchandise and ticket sales.

Learn more about starting a record label.

While there is a lot of competition, an independent record label has the potential to be quite profitable.

Record label profits vary widely depending on the number of artists you sign and their level of popularity. Record labels can start off small with only one or two artists. With the increased popularity of streaming music online, it is possible to gain listeners to your label’s music without having to spend a lot of money on pressing albums.

Learn more about starting a record label.