When musicians ask me if they should incorporate, I suggest speaking to an accountant to advise them from a financial perspective if the time is right. Ottawa-based music accountant Charlie Sohmer spends more time talking clients out of incorporating rather than into incorporating.
By Byron Pascoe
It’s helpful to understand the different business structure options, so you can make informed decisions about what makes the most sense for your music business now, and moving forward. To be clear, being a musician is a business.
There are three business structures in Ontario—sole proprietorship, partnership, and corporation.
A sole proprietorship is not a legal entity. It’s you carrying on business with a business name—which is either your actual legal name or not. For example (spoiler alert!), musician Gareth Auden-Hole carries on business as Jake Pine. Gareth is a sole proprietor who uses Jake Pine as his stage name.
According to Ontario’s Partnership Act, and as further described in my band agreement articles, a partnership is “the relation that subsists between persons carrying on a business in common with a view to profit.”
If you’re in a partnership (for example, the members of a band), your partnership is governed by the Partnership Act. You’re not the only musician who has never read it. However, you can replace the default rules of the law with a partnership agreement.
Incorporating creates a new entity. It may be owned by you, but it isn’t you.
The typical reasons to incorporate are to provide for the possibility of tax planning, and to separate yourself from the business for liability purposes.
Other general music reasons to incorporate include that the corporation can be used as a vehicle for investment. There are some music grants, including Ontario Music Fund programs, that require incorporation, or being in the process of incorporating, in order to be eligible for funding.
However, there are practical challenges that come with separating yourself from the business. If you set up a corporation, and need a loan, the bank will likely not just deal directly with the corporation. They will likely want you personally to guarantee the loan. Further, as raised by Sohmer, unincorporated businesses can purchase the same liability insurance as incorporated businesses.
Regarding tax savings, according to Sohmer, “the only real tax saving is actually just tax deferral, and with a lot of my clients, they need all the money they earn each year in order just to pay their bills, i.e. they do not have a lot of extra earnings, upon which they could defer taxes if they were incorporated. Because if you are drawing out all your earnings, then regardless if you are incorporated or not, you end up paying roughly the same amount of taxes.”
“Additionally, you’d have to file two tax returns annually, corporate and personal, rather than just the personal return. Corporate returns are typically 3-4 times as expensive as personal returns if hiring an accountant to prepare them. You’d also have to keep two separate sets of books, two separate bank accounts, etc.,” says Sohmer.
After weighing the pros and cons, if you decide to incorporate, you can either do it on your own, or with the help of someone else, including a law firm.
One of the choices when incorporating is whether to incorporate provincially or federally. In Ontario, incorporating federally is less expensive from the outset, but there are nominal annual fees, and the details of the corporation’s address and directors are available for anyone to find online for free.
In Ontario, incorporating provincially is a bit more expensive from the outset, but it isn’t as easy for the public to access information about the corporation for free. If you intend to carry on business within multiple provinces, which means more than selling music to audiences in multiple provinces, depending on the circumstances, it will likely be suggested to incorporate federally.
Also, the incorporation can be a numbered corporation (such as 1234567 Ontario Inc.) or a corporation with a name that you choose (so long as its approved), such as *Insert Your Name* Music Inc.
If using a law firm, there are two sets of fees. There are legal fees to assist with relevant approvals for the use of your intended business name, to prepare the opening resolutions and corporate by-laws, to help with determining the share structure, to issue the shares, and to obtain all of the third party materials. There are other funds paid for third party costs, including government fees.
When I help musicians and music companies incorporate, here are the initial questions we discuss:
- Ontario or Canada corporation
- Corporate address,
- Incorporator’s address,
- Share classes,
- Names of shareholders and their percentage holdings of each class of shares,
- Corporate accountant,
- Corporate bank,
- Fiscal year end (this may be a question to ask your accountant).
Speaking of accountants, I’ll give Sohmer the last word…. “Long story short, unless you’re making a lot of money and you don’t immediately need to draw out all that money to run your lifestyle, then don’t bother incorporating.”
* Byron Pascoe is a lawyer with the Ottawa-based Edwards PC, Creative Law (www.edwardslaw.ca), which provides legal services to Music, Digital Media, Game, TV, Film, and Animation industry clients. He can be reached at email@example.com
* Byron works with musicians and music companies to assist with record label agreements, publishing contracts, distribution deals, producer agreements, band agreements, etc.
* This article is for general informational purposes only and is not to be construed as legal advice. Please contact a lawyer if you wish to apply these concepts to your specific circumstances.