By Bob D’Eith
author, lawyer, musician
Many musicians and music professionals wonder whether they should incorporate. Most of the time, they don’t actually know what that means. They just know that some funding organizations say that they need to be incorporated to get funding or they are told that they might get treated more seriously by the industry if they incorporate. The reality is that there is a good time to incorporate and a bad time to incorporate.
Musicians or music professionals can carry out their business as an individual, a sole proprietorship, a partnership or a company. Individuals normally work on contract or as an employee. Individuals can register a sole proprietorship to separate their music income from other incomes. Most bands are partnerships under the law whether they register or not. A partnership is two or more people carrying on business together. A partnership can and should be registered with the provincial government. Any of the above entities can become a company (your accountant can advise you on a s. 85 Income Tax Act
roll-over which allows you to roll your assets including your copyrights one time into a company).
First, though, let me explain what a corporation is. The concept goes back to the Roman Empire where a “body of people” or corpus
was recognized as a legal entity. During the mercantile era in Europe “charters” were granted to entities such as the Dutch East India Company
to allow them to operate as business. During the industrial era, companies were created under legislation. It was only later in the mid-1800s, however, that companies could enjoy what is referred to now as “limited liability”.
One of the key reasons to incorporate under a modern company is “limited liability”. This means that for the most part shareholders and directors of companies are shielded from personal liability. A contract with a company is with the company and not the individuals forming that company. Of course, this does not apply to certain liabilities such as payment of taxes. It is important to consider limiting liability as your career grows. You have more to lose as your success increases. Incorporating and then dealing strictly as a company will create a legal shield, protecting your personal assets.
Another important reason to consider incorporating is that companies pay a lower tax base than individuals in Canada. Therefore, profit made in a company will garner less taxation than if that same profit is made by an individual or a partnership. I normally defer to a client’s accountant as to when the best time to incorporate is for tax purposes. If you are making a loss, then you may consider not incorporating. Most music businesses make a loss in the first few years. Business losses incurred by an individual, sole proprietorship or partnership can be used against personal income. As a rule of thumb, I suggest that clients wait until they are in a profitable position before incorporating.
As an aside, many of my clients who are songwriters and making a lot of revenue from SOCAN and other publishing sources set up a separate, solely owned company to receive their royalties. This is strictly a taxation issue and SOCAN recognizes a songwriter’s ability to set up this kind of entity. It saves the songwriter from receiving songwriter royalties directly and having to pay a higher tax rate on that income.
You also need to consider the cost of incorporating and maintaining the corporation. While it is possible to incorporate online, there are a number of steps that need to be taken other than simply registering the company. These include the creation of a number of resolutions, share certificates and other documents that need to be added to a “Minute Book” that is set up to hold all of your documents. The cost of incorporating a simple company through a lawyer will be $1,000.00+. There are also costs associated with this maintenance. You also have to keep in mind that you will have to keep separate accounting books, file a separate tax return and file an annual report with the Company Registrar every year. Accountants will charge $500+ per year to file a simple corporate tax return. Lawyers will charge $300-500+ to file annual reports and prepare the necessary annual resolutions. If you fail to keep your company up to date, then eventually it will be struck from the record and all of the company assets may transfer to the government (the crown). So, do not decide to incorporate lightly.
While there is some merit in the idea that forming a limited company may result in you being treated with a little more respect by the industry, that is really not the best reason to incorporate. Also, if a funding agency requires incorporation, then you really need to balance the pros and cons to making a decision based solely on funding. Many people have set up complicated business structures in order to comply with funding requirements only to have those requirements change.
I truly hope that you will be in a position to incorporate at some point. This means that you are profitable and making a success for yourself. Best of luck in your endeavors!
Author – Lawyer – Musician
Check out my new book: “A Career in Music: building your inner circle”