(This post authored by FMC communications intern Caroline Fox.)

Mucca Pazza is unique. Their name—meaning “crazy cow”— is unique. Their 30-something member “circus punk” marching band is unique. And their business structure, which works like a corporation and structures shares of the company around socks (you read that right, socks, not stocks) is certainly unique.

We recently chatted with Meghan Strell, Elanor Leskiw, and Mark Messing of Mucca Pazza about the way they do business. Years ago, their group decided that the best way for their band work together was to incorporate. They spoke to financial and business advisors, and discovered that unlike the typical band that forms an LLC, a corporate structure aligned best with their needs. “The corporate structure made sure that everyone had a piece of the pie,” they noted. But the formality of corporations can feel a bit intimidating and stuffy. That is where the socks came in. “We to give members something to represent their share of the organization,” they said, so they chose the symbolic use of socks instead of typical stocks as both a way to keep track of members’ interests as well as to lighten the mood. More socks are distributed for more years of participation with the group.

(More information on how Mucca Pazza administers its unique structure can be found here.)

So why would you want to create a business entity for your band? The ability to ensure against getting sued for things your band members may do, to determine how to split profits, and to secure loans and funding are all good reasons. Another primary reason is somewhat darker: in the words of one notable music law professor, “We want to know in advance what happens when people start hating each other.” It’s easy to get along when the group is doing well and making money. But what happens if the group falls into debt, gets sued, or the band members stop getting along? Making the band a legal entity will help ensure that in the case of a legal dispute, the court will act according to your agreement. This can save you from massive financial losses, especially if you have chosen a limited liability structure.

For these reasons, many record labels will require bands to form a legal business entity before contracts are issued. They would rather deal with a structured organization than with individual people. Please note that this is a 2000 ft. overview of each business structure, and does not constitute legal advice. You should consult a lawyer before making any major decisions on establishing a corporate structure.

Sole Proprietorship:

If you are a one-person act, you are already a sole proprietorship. You control everything about your business, and pocket any money you make. As a sole proprietor, you are personally liable for any debts and losses your business suffers, but you also reap the benefits of any profits. No formal creation is required, meaning that you don’t have to file any paperwork or pay a fancy lawyer to become a sole proprietor of your own music business.

A sole proprietor may use a trade name or pseudonym while performing or conducting business. In many states, sole proprietors acting under a pseudonym should file a “doing business as” statement with the state in order to allow others to know with whom they are dealing.

General Partnership:

A general partnership does not require formal creation, either. This means that you can be sitting around your kitchen with your friends and say, “Hey, let’s make a band/singing group/musical interpretive dance troupe” and you now have formed a general partnership.

As a general partnership, all members are all personally responsible for any debts the partnership may incur or for any legal action taken against the partnership. This means that if a partner takes out a loan, the other partners are “jointly and severally liable,” and their personal assets can be attached and liquidated to pay off any debts. The same goes for contractual obligations signed by one partner—it binds all others. By “personal assets” we mean things like money, house, car, etc., so always make sure you trust your partner!

Partnerships are not taxed as separate entities, unlike a corporation. Members of a partnership are only taxed individually, and the partnership itself is not taxed secondarily. A partnership also has more credit to work with, as there are more members with more assets. Therefore, a partnership has more of a chance getting a loan from creditors, who see a group of borrowers as more stable than a single sole proprietor.

If partners wish to add a new member, they must get a unanimous vote from the other members. A partnership ends when one partner leaves, i.e. if the group breaks up or one of the group members quits. But never fear! You can form a new partnership as easily as you did the old one!

Partnerships are governed by a partnership agreement, written and signed by the partners. It can be used to tweak some of these default rules, like dividing profits differently. If you don’t sit down with your partners and write up a partnership agreement, the court’s default rules will split everything 50/50 in the instance of a legal dispute.

LLC:

If you are looking for a way to shield individual members from liability, consider a limited liability company, or an LLC. To set up an LLC requires filing with the state, but the process is fairly painless. Members must file a certificate with the state and pay a small fee (which varies based on the state). LLCs must also have operating agreements that sets out the member’s ownership and control over the company. It must also state how the members will divide profits and losses.

An LLC has many of the benefits of a partnership while shielding the members from personal liability. As a member of an LLC, you are not responsible for the debts or contractual obligations of a corporation. This means that if the company defaults or falls into debt, you are not personally responsible and creditors cannot come after your personal assets. For example, imagine that you are a member of five-person rock group. The drummer is convinced that you need a tour bus with a huge picture of your faces on the side. Everyone else, however, is against the expensive (and tacky) idea. But the drummer goes ahead and buys the tour bus anyway with a loan issued to Rock Band, LLC. Generally, creditors could not come after individual group members for their personal assets, such as their houses, cars, etc. to repay the debt incurred by your crazy soon-to-be-ex-drummer.

Members of an LLC must put “LLC” in their company name and on business cards in order to let creditors know that they are working with a limited liability company. Because creditors cannot use personal assets as collateral in the instance of default, it is often more difficult to procure loans for an LLC than for a partnership or sole proprietorship.

Unlike a partnership, if a member of the LLC withdraws, the LLC still exists. This structure allows for band members to shift in and out of the company. New members are admitted to an LLC through a unanimous vote by the existing members.

By default, an LLC is a “member managed” group. This means that the members/ owners are controlling the organization, and there is no separation of ownership and control. However, an LLC is flexible and its default rules are easily changed. Therefore, the members can appoint a manager—making the LLC a “manager-managed” group. This would be helpful when the members want to appoint someone who is more business savvy or fiscally responsible than the individual group members, or when the members do not want to be troubled by mundane business decisions.

Corporation

A corporation, while complex, allows for the most freedom in restructuring and personalizing the organization’s structure. To form a corporation, the members must file a certificate of incorporation with the state and pay a small fee—usually around $250, but varying by state. Corporations also have the luxury of incorporating in the state of their choosing, which affects the laws surrounding the organization.

A corporation is a great option if you are trying to give members different rights in the company, or assign different weight to votes. For example, imagine that you are the founder of a band. You brought everyone together, you write the songs, and you bought most of the equipment. Wouldn’t you want to make sure you have more say than the always-late wild-card tambourine player who constantly begs the group to play “his songs”? A corporation’s structure can be adapted to make sure that you have more decision making power.

Like LLCs, corporations shield owners from personal liability (unless you do highly illegal, fraudulent things). However, by chosing a corporate structure, you assume certain fiduciary duties to investors buying stock in the group. These duties include the obligation to act with the  honest belief that your decisions are in the best interest of the organization, to act in good faith in organizational matters.

No matter what strucuture you chose for your group, it can be worthwhile to seek legal counsel when establishing any sort of business dealings. There are many caveats and exceptions that can apply in specific situations, so always make sure you check with your lawyer before filing papers with the state.

(Our thanks to Mucca Pazza for assistance with this article. Mucca Pazza perform July 15 at the 9:30 club in DC, and July 16 at Tour De Fat)