Owning a recording studio is a potentially lucrative career choice, but it’s time to get your mind on the business.
With a recording studio business, you can create and enhance valuable content for television, movies, video games, documentaries, and other audiovisual media – your potential clients are endless!
As a business owner, you will need to determine the business structure you’ll use. This structure is the legal framework under which your business operates and greatly shapes how you run your studio, influencing how the business, you and other owners are taxed. It determines the operating structure you can use to manage the business and what if any, legal filings you must submit.
Most critically, it can shape how personally liable you are if there is an adverse legal decision against the company.
Knowing the different types of possible business structures available, as well as the pros and cons of each, can help you make an informed decision. So, let’s go over your options.
Understanding Business Structures
There are four core business structures to consider – sole proprietorship, partnership, corporation and limited liability corporation (LLC). Below, we will describe each in detail and how they differ from the others.
Sole Proprietorship
This is the simplest, most basic business structure, as there are no formal filing mandates or paperwork to fill out.
In a sole proprietorship, you are the sole owner of your business. You make the business decisions and are responsible for the outcomes. You can run a sole proprietorship the way you want, with full flexibility for its operations.
From a tax perspective, a sole proprietorship is a pass-through entity. The company’s financials are transferred to your individual income tax returns.
One major risk of having a sole proprietorship is the lack of liability protection. With a sole proprietorship, creditors can come after your personal assets in the case of an adverse judgment against your recording studio business.
Partnership
A partnership is another simple business entity designed for businesses with two or more owners (partners).
Like with a sole proprietorship, a partnership is a pass-through entity when it comes to taxes.
There are many kinds of partnerships available, but the two most common are limited partnerships and limited liability partnerships.
In a limited partnership, there is one general partner who has unlimited liability and one or more limited partners whose liability is also limited. The limited partners have reduced control over the business’s operations and outcomes. The stipulations, ownership shares, and operational guidelines are determined in a partnership agreement.
In a limited partnership, the general partner may have to pay self-employment tax in addition to income tax.
In a limited liability partnership, limited liability is available to every partner, each of whom is not responsible for the actions of the other partners.
Corporation
A corporation is significantly different from other business structures. There are two primary types:
A C corporation is a legal entity that is separate from its owners, who are considered shareholders. The corporation files its own taxes and can be sued and held liable.
While corporations provide shareholders with the broadest liability protection, they also have higher start-up costs and regulatory mandates. Corporations must keep careful records, file income taxes, have board members, hold annual meetings, and report to the public on financial performance, organisational structure, and operations.
C corporations are hampered by the double taxation caused by its structure. Not only does the corporation pay taxes on its profits, but shareholders also pay taxes on any dividends paid out by the business.
An S corporation is a special kind of corporation designed to avoid double taxation. S corporations can pass through profits to their owners’ individual tax returns, but the number of shareholders is limited, and the IRS must approve the status.
Limited Liability Corporation (LLC)
There’s a reason recording studio owners and thousands of other business leaders choose to form their businesses as LLCs. With broad latitude in how the business is operated, flexible tax policies, and powerful asset protections, it’s a smart choice, and here’s why.
Benefits of Forming LLCs for Recording Studios
The LLC structure is the most popular business structure for several reasons. It has major benefits compared to the other structures that can leave owners with more operational flexibility and more money in bank accounts.
Limited Liability Protection
Limited liability protection may be the most meaningful benefit of operating as an LLC. Imagine if your business is sued due to any number of circumstances. A court ruling against the company could be financially devastating.
However, if your business is organised as an LLC, you enjoy broad protections as an owner.
Your personal assets are protected in such cases. From a legal perspective, your personal and business liabilities are separated. These protections mean creditors cannot come after your personal assets, such as your home, car or savings.
Please note: In rare cases of extreme negligence, the liability protections do not apply.
Tax Benefits
There are several meaningful tax benefits to operating your company as an LLC.
The most basic advantage is that, like in other business structures, an LLC is considered a pass-through entity. That means the profits, losses and business expenses pass through from the corporate entity to the owner or owners.
The owners then reflect those financial considerations on their personal, individual tax returns. The LLC itself does not file taxes.
This pass-through status means that the owners avoid double taxation at both the federal and individual levels.
There’s also some flexibility for how you classify your business in the eyes of the Internal Revenue Service with an LLC, as the IRS has guidance for how the LLC is taxed based on the number of members it has.
A domestic LLC with two members is classified by default as a partnership. However, the LLC can file Form 8832 and classify itself instead as a corporation. Even an LLC with a single owner can file the form and be taxed as a corporation, specifically an S corp.
An S corp filing status allows for a reduction in self-employment taxes. With such a structure, an owner can be considered an employee of the company and receive a salary.
Self-employment taxes then only need to be paid on the salary. The rest of the profits can be distributed to members in the form of dividends.
Professionalism and Credibility
Having the letters “LLC” after your business name can raise eyebrows … in a good way.
With an LLC, you show your customers, competitors, partners and employees just how seriously you take your recording studio business.
An LLC designation means you’ve taken the time to establish the business structure, complete the necessary paperwork and operate your business with robust operational and legal guidelines in place – It’s an excellent way to build credibility and demonstrate professionalism!
Additionally, for further support and to ensure compliance with all legal requirements, it can be beneficial to consult legal sites that offer resources and guidance tailored specifically for LLCs and other business entities.
Flexibility in Management
With an LLC, you gain all the formality and protections afforded by the legal structure. You also gain considerable professional flexibility with how you run your business.
As an owner of the LLC, you can choose to run your business in multiple ways. If you (or a fellow owner) will be running the company daily, it’s considered a member-managed LLC. If, instead, you choose to hire someone to run the business on your behalf, it’s a manager-managed LLC.
There are multiple services that provide expert registered agents. Before choosing one, it’s essential to review registered agent service thoroughly to make an informed decision.
There are other flexibility considerations, too. For one, you do not have the public scrutiny that corporations are subjected to. There are no public filings about financial performance and company growth that can greatly shape the company’s fiscal health. There are also fewer arduous regulatory mandates that corporations must follow.
Steps to Form an LLC for Your Recording Studio
When you’re ready to form an LLC, there are several key steps to take.
- Choose a Business Name. A business name is an important step, and it’s essential to choose a name that reflects your recording studio company. To avoid confusion, states have online registries that help you see if the name you’re thinking of has already been taken. Please note that states also have rules that restrict choosing names that may misrepresent certain kinds of businesses.
- File Articles of Organization. Most states require an LLC to file Articles of Organisation (though it’s not always called that in every state). These articles are fairly simple and include basic information on the company and its owners. Filing this paperwork with the state is a necessary requirement to legally form an LLC.
- Create an Operating Agreement. An operating agreement is a must-have, especially if you have multiple owners. The operating agreement outlines the ownership details, including percentages and roles. It also details how the business operates, how disputes are managed and how members enter or exit the LLC.
- Obtain Necessary Licenses and Permits. Your business may be required to file for various licenses and permits for your studio. The types of permits necessary can vary greatly based on where you are located. Most of these licenses and permits are determined by the community and/or state where your business is located.
- Register for an EIN (Employer Identification Number). Think of an EIN as the business equivalent of a Social Security number. The Ein is used by the IRS for tax purposes and is a unique identifier. An EIN is often a mandated requirement for opening a business bank account.
State-Specific Considerations
With an LLC, you have a choice of where to form your business.
Each state has different guidelines, regulations, costs and structures related to an LLC filing.
It’s important to research where to form your LLC, given the wide variances by state.
For example, forming an LLC in California has distinct advantages. You only need to pay $800 tax annually in addition to a fee charged based on your annual income.
In addition to the steps outlined above, when forming a California LLC, you’ll need to name a registered agent. This agent accepts orders of process (such as subpoenas or other legal documents) on your company’s behalf.
A recording studio is a great way to become a business owner. When selecting a business structure for your studio, an LLC is the wise and financially sound choice.
Cast Voiceover Talent
Discover Global Recording Studios
More from this author
Sometimes we include links to online retail stores such as Amazon. As an Amazon Associate, if you click on a link and make a
purchase, we may receive a small commission at no additional cost to you.
