How do you determine financial success in your music business?

Two close boyhood friends grow up and go their separate ways. One becomes a humble monk, the other a rich and powerful minister to the king. Years later they meet. As they catch up, the minister (in his fine robes) takes pity on the thin, shabby monk. Seeking to help, he says:

“You know, if you could learn to cater to the king you wouldn’t have to live on rice and beans.”

To which the monk replies:

“If you could learn to live on rice and beans you wouldn’t have to cater to the king.”

- Parable borrowed from jlcollinsnh.com (an excellent personal finance blog)

There are myriad ways to judge financial success of your business, especially because your business is really 4 businesses (recordings, songs/publishing, performances, and merchandise). Below we’re going to look at a few of the basic ways to judge success.

One way is to look at the top line. This is your gross revenue. The more you make from licensing, the larger your crowds at concerts, the greater your gross revenue. Say your licensing and concerts yield you $100,000 in a year - that’s your top line.

Another way to look at financial success is to measure the bottom line in relation to the top line - this is called your profit margin. Using the $100k example above, after all expenses to crew and management and travel you end up with a net of $30,000. That’s your bottom line. Your profit margin here is 30% ($30k/$100k). In the live touring business with management, biz mgmt, lawyer and all the standard expenses of touring you can expect a profit margin of 30-35% on average.

Another metric is to look at profit per member. Using the above example, imagine the business was owned by one person so profit margin of 30% and $30,000 for one person is $30,000 take home pay for that person. Imagine that business with 4 members and you’ll see that the take home pay per member is $7500.

Using these three options above, how would you be inclined to judge success? I think most of us would judge success by the first option - top line. Visually we can estimate this level of success very easily. How many people could they get into an show? How many plays on Spotify? Those are the sexy numbers.

I would make the case that metric #1 above is also the worst way to judge success for yourself even though it’s the sexiest. I find that when you look at the big picture and simply state, I want to get there, you end up spinning on that image and getting depressed that you’re not there instead of focusing what’s in front of you right now. What’s in front of you right now is that you have a band and you can play some shows and record and distribute a record, all for very little money. So…

What you really want to focus on is the most unsexy - reducing expenses right now and driving up Metric #2 - your bottom line. You want to shoot for the moon, and you should. If you want to be an arena act, that’s great. Just know that there is one skill that you can learn now that will travel with you all the way to the big leagues - and that’s the skill of keeping expenses trim. Of running a lean business. Learning how to judge what expenses or investments are important for what stage of growth and when to invest to get a certain return. It’s a thoughtful process and skill and I often turn to Mr. Money Mustache when I need a pep talk or some inspiration… and you should too. Learn how to run a tight ship now and then when the money does come pouring in, you don’t squander it because you’re a seasoned money manager.

Metric #3 above, the profit margin per member is my next favorite. Pull back the covers and you’ll realize that sometimes a band making twice as much money as another may actually take home less money per individual. One band makes $900k and has 5 members and a 22% profit margin - each member takes home $40k. Another band makes $450k and has 4 members with a 50% profit margin and each member walks home with $56,250. (These are based on a true story :).

There is no right way to get the profit per member to the sweet spot. It’s a dance of lifestyle choices, artistic vision, and judging what’s important for the critical path. What is clear is that the skills you develop in thinking about each investment/expense along the way and purposefully pushing yourself to maximize each stage of development with the resources at hand will go with you throughout life.

The ultimate goal is to live comfortably on your art and be able to save and invest for your future self. The best way to do that is to increase your profit margin.

You are an artist and a business owner

In the modern era, there is no such thing as just being an artist. Perhaps it’s always been that way for the most successful artists - that they were also keenly aware that they were also business owners. I read that Mick Jagger attended London School of Economics and was always on top of the Rolling Stones’ business affairs. Certainly now though, you can’t escape the fact that you need to think and act like a business owner. The joy of having a fractured marketplace where thousands of bands can have thousands of fans is that you can make a living on your art. You may not get Taylor Swift famous or Jimmy Buffet rich but you will be able to support yourself and even get to the point where you can make enough money to save and invest for the future “rainy days'“ and retirement. In order to do this though you need to watch your expenses and deeply consider what’s important to your critical path of success, and be sure you capture all of the money in and notice when it’s not there. In other words, you need to be a Business Owner, not just an artist.

You hold the strings. You hire a manager to help you grow your business… but you hire the manager and you determine how they are doing. It might seem like they have the leverage and that’s how most artists treat it, but who owns this business at the end of the day or the term? You do. Think of another business that’s just starting out and the time comes for them to hire an executive to help them grow the business? Do they just close their eyes and hope for the best? Nope. They hire, engage, and help drive the ship and set that executive up for success and they also have the difficult conversations about what’s expected in terms of results. You hire a business manager and you expect the same. Outline what you want and expect in terms of information and transparency and know that ultimately this is your business.

Will you still have time to be an artist? From what I have seen of our clients, yes, you will still have time to be an artist. You will have your daily routines to keep you grounded and you will take extended periods for reflection and writing. And on the days when the business hat is on you will check in on your team. You have no choice. You are a business owner and an artist.

How do I earn money from songwriting?

I understand there is some question about how publishing money is earned and split along the way.  I'll do my best to explain below.

At the foundation, as you know every song has 2 rights associated with it - a right for composition (those who wrote the song and/or the publisher) and a right for the master/recording of the song.

To determine how a song earns money you need to first consider how the song is used.  Depending on how it's used there will be different entities collecting money and the amount paid for type of use varies as well.  

The most common uses are listed below:

Public Performance of the song - When played on the radio, when streamed on Digital Service Providers (DSPs), when performed by a band live.  

Collected by: PROs like ASCAP, BMI, or SESAC.  The radio station, the DSP, the venues/festivals all pay an annual license fee to the PROs to be able to have music playing publicly.  

How payments are determined and made: This is a black box calculation.  It depends on the entity paying the PROs but they usually make a payment based on revenue.  Then the PROs do some kind of auditing throughout the year to determine how often songs are played and then based on that they make payments to the writers/publishers.  


Sale of a song or pressing an album - When an album is pressed or a track is sold digitally, a mechanical royalty is due on that track.  

Collected by: In the case of a song release on a major label, the label would typically pay the writers directly.  In the case of a self-release mechanicals may not get paid at all internally.  In the case of a song covered by someone else, the payments may get made to Harry Fox and then your publisher would collect them from Harry Fox.

How Payments are determined and made: Mechanical payments are $0.91/song and this can be negotiated a bit with a label but this is the gov't set statutory rate.  

Interactive Streaming on DSP - When a track is played on a DSP like spotify, two composition payments are made.  One for public performance and one for a small mechanical.

Collected by: the public performance payment is collected by the PROs.  The mechanical payment is made directly by the DSP and collected by your publishing admin or Harry Fox (which then is passed on to the publishing admin)

How Payments are determined and made: In the case of the public performance royalty, it's the black box calculation again as it goes to the PROs.  In the case of the mechanical paid, my understanding is that it's around $0.0008 per song.

Sync licenses - Half of every sync license is for the composition side.

Collected by - Usually these are paid directly to the artist or to the sync agent

How payments are made and determined - Once the money comes in, the payments made follow the splits of the song as it's registered.

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What kinds of insurance should I carry for my touring band?

Only you can ultimately answer this question as the business owner but I’ll outline the primary types of insurance that bands carry, explain the purpose of the insurance, and give you a general idea of cost. With this information, hopefully you’ll be better able to make the decision of what insurance to carry.

General Liability Insurance

Purpose: This insurance covers you for property or bodily damage caused by your business up to a limit, usually $1M or $2M per incident. It is not uncommon for festival and government promoters to require a Certificate of Insurance for this coverage.

Example: If you throw drum sticks from stage and injure someone, this type of insurance would cover you.

Annual cost: Between $1000-2500 is the approximate range with $500-1000 deductible. You can get one-off coverage sometimes by being added onto the promoters policy in the case of festivals, or you can apply through https://www.theeventhelper.com for a one day policy that will cost around $200.

Workers Compensation Insurance

Purpose: This insurance covers medical bills and a portion of lost wages for a person injured on the job. This insurance is issued in relation to the state of residence of the employee or contractor. You might think, well, I have health insurance for that, but if your health insurance discovers that the injury happened on the job they may (and likely won’t) cover the medical bills.

Example: Crew member is pushing a case up a ramp into the trailer and his knee gives out. Or band member is on stage rehearsing and slips off the edge and injures leg.

Annual cost: Approximately 1-4% of annual payroll, depending on the state and the job the employee does. If you have all Virginia employees doing clerical work the rate may be 1.1% and if you have a FOH sound person on the road based in California the rate may be 4.0% or more. There are also minimums per state so even if you have only $10k of payroll in Virginia, there may be a minimum of $35k; this depends on the state.

Automobile Insurance for Owned Vehicles

Purpose: This insurance can coverage liability and collision. Most of you will be familiar with this insurance from insuring your personal vehicle. It works a lot like that except that sometimes an insurance company will want this policy to be a commercial policy which can be a bit more expensive.

Example: You hit a deer on the highway or get into a fender bender. You call up your company - Geico, State Farm, Erie, etc and they help you through the process.

Annual cost: $750-2500. I’ve seen this upper end go up to $4000 for a 3-year leased Sprinter but that was an outlier.

Hired and Non-owned Automobile Insurance

Purpose: This insurance covers vehicles used on behalf of the business for business purpose. It often covers rented buses or rented vehicles (like vans from the airport) or crew member vehicles in use for work.

Example: A crew member driving their own vehicle, towing the band trailer to meet the tour bus and the vehicle is involved in a fender bender. This vehicle could be covered. Or a tour bus is being rented by a band and damage is caused to it, this insurance would cover that.

Annual cost: $750 and this is added onto a commercial auto policy. I’ve not seen one of these written as a stand alone policy. Deductible usually $500-1000.

Equipment Insurance / Inland Marine Insurance

Purpose: This insurance covers your equipment and gear up to a certain amount per policy period. It can be a policy with scheduled equipment meaning that you list out ever piece the policy covers or it can be unscheduled where the policy just covers equipment up to a certain amount but the equipment doesn’t need to listed out. This policy covers equipment both on the road and in your studio (though you may also have renters insurance or home owners insurance for that gear). The basic idea of Inland Marine is that it covers equipment that moves around.

Example: Some jerk breaks into your trailer and steals your stuff. Happens all the time, right? Another example of this was a crew member using his personal truck to transport gear. His truck was broken into and the insurance reimbursed him for the lost equipment and his personal gear stolen since it was a business purpose and unscheduled equipment.

Annual cost: Approximately $500-1000.

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All of these insurance policies make sense and are well worth the investment to keep you financially secure in case of an accident. I have seen every one of these policies used with either our band or festival clients. The expense seems like a burden annually until you actually need to use one of these policies and then it feels justified and like a good investment.

Is a single-member LLC more expensive than a Sole Proprietorship, especially in California?

Ben,

My Tennessee based client is currently using his SSN on W9s. i want to move to an LLC. 

My client’s accountant is advising them not to due to the fact that we would then have to file in CA and it would cost $700 more to do so. Is that true?

Signed,

No More Sole Prop

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As always, remember I’m not a CPA, so you should consult with your CPA and lawyer on everything that you read here or anywhere. I often will read several sources on a subject and ask multiple CPAs. I’ve come to realize that tax related issues aren’t always black and white. That said, I’ll explain what I’ve learned…

1.  You don’t need an LLC to have a Tax ID. Even if he doesn't have an LLC he can still get a tax ID number for his sole proprietorship if you guys don't want his social security number out there.  https://www.irs.gov/businesses/small-businesses-self-employed/how-to-apply-for-an-ein

2.  Tax wise with Federal Gov't there isn't a difference between a sole proprietor and a single member LLC.  The single member LLC is a disregarded entity and ends up flowing onto a personal return just like the Sole Prop.

3.  That said often lawyers will recommend setting up an LLC and getting liability insurance to protect an individual's assets in case of a law suit; The corporate veil if you recall from Business Law 101.  As is stands right now with a sole prop, if in the case of a significant law suit involving the touring business, personal assets (homes, cars, etc) are all open game.  If you have LLC protection then those things can't get touched.  

4.  Regarding California or any state for that matter, my understanding is that if your business regardless of type (LLC, or Sole Prop) has nexus in the state then it needs to file a business tax return there.  Nexus means that the business operates there, earns money there, sells things there.... basically what happens every time a show happens in a state.  

That said, many bands making not much money play many states each year.  Technically even the smallest of bands, if they operate in multiple states, are supposed to file a tax return there.  But the administrative costs to do so would be too much for a small business.  So most businesses don't do it because such little money is made in each state.

California is a state like any other. Regardless of entity type (LLC, Sole Prop, etc) if your business has nexus there then it is required to file a tax return there. So just converting to LLC wouldn’t trigger the need for a return there. Having nexus is the trigger.

It is true that if you did file a corporate tax return in CA as an LLC there would be a $800 minimum tax which you wouldn't have as a sole Prop.  More info here. To the point in your email, a state having a fee is not unique to CA either. Most states, if you file there due to nexus, will have some kind of tax due.

5.  Other costs for the LLC might include: the tax return is probably a bit more expensive.  Most states have annual fees to keep the business active. Mass is $500/year for example. Obviously California is $800. Some states are minimal though. Virginia is $50 for example.

6.  Touring in Canada and AUS the limits would be the same as a single member LLC or as an individual.  You would tour in each place as an individual.  Both places have limits under which no withholding is required and likely no tax return required… but that’s another post for another day.

Ben