Starting a record label involves multiple legal considerations. These include choosing the best legal structure for the label, obtaining licenses and permits, picking a name for the label, dealing with copyright issues, and getting adequate insurance.
Choosing the Business Entity
You might be able to operate a recording business as a sole proprietorship or partnership. However, you should think about using a legal form that protects you from personal liability for both damage to people or property and for financial debts. Consider, for example, what would happen if you incurred a lot of expenses recording and marketing multiple new artists, and then found that their music did not sell well enough to cover those expenses—and the label did not have enough money to stay in business. In such circumstances, you would probably want the business, not you personally, to be responsible for any debts.
Keep in mind, though, that legal structures that provide you with more protection from liability will also require more time and effort to maintain. For example, they generally involve more complicated tax returns and frequently involve preparing annual filings with the state. You will need to weigh the added time against the risk to you personally if the business runs out of cash—or some other liability arises.
Learn more about choosing a business structure.
Licenses and Permits
Even if you operate as a sole proprietor, you should consider obtaining a federal tax ID number, known formally as an Employer Identification Number (EIN); for other legal forms of business, an EIN is a requirement. The process is easy and can be completed online at the IRS website. Moreover, even if you operate as a sole proprietor, you may need a general business license from a state or local government office. For example, if your record label will operate under a business name different from your own name, you may need to file a “doing-business-as” (DBA) certificate (sometimes known as a fictitious business name certificate).
Most states will also require you to obtain a sales tax permit in order to sell CDs or other goods in that state. Note, however, that sales tax on Internet-based sales is a more complicated matter—you can find more information about Internet sales tax, including the rules in every state under eCommerce Law on Nolo's website.
Even if your recording business is “low-key,” keep in mind that there may be local zoning laws that would prohibit your business in certain locations. This generally is more likely to be an issue if you are thinking of operating the business out of your home and you live in a clearly residential, as opposed to commercial, area. Even if the business is permissible under the local zoning ordinance, you may be required to obtain a compliance certificate from the local zoning authority.
Naming the Business
In naming your business it is important not to violate trademark laws. This means not naming your label in a way that might create a “likelihood of confusion” with a preexisting commercial enterprise in the same field. Such confusion might arise if the name you choose is identical or very similar to the name of another business or product.
In the Internet age, avoiding trademark violations means avoiding the same or a similar name of a recording label or similar business anywhere in the country. If you name your Seattle-based label Blue Shock Music and there is already a popular label in Atlanta named Bleu Shox Sounds, you may well find yourself looking at a trademark infringement suit. You should not expect the geographic separation to protect you.
The best approach for avoiding this type of trademark issue is to try to make a thorough search of existing record labels, recording companies, entertainment companies, and other businesses before settling on a name for your own label. This may include:
In addition, if you want greater certainty you can hire a professional service to do a more thorough investigation of the name in which you are interested. The cost is usually a few hundred dollars.
To learn more, see Choosing a Business Name FAQ, Make Sure Your Proposed Business Name Is Available, and How to Register Your Business Name on Nolo's website.
Copyright is a form of legal protection for "original works of authorship," a term which covers, among many other things, music, lyrics, performances, and sound recordings. Copyright protection is crucial to a record label. Without it, anyone could make pirated copies of the label’s recordings, and then sell them or give them away, thus eliminating all of the label’s potential profits.
Most music that ends up being recorded involves the following copyrights:
All of these types of copyrights may come into play for a recording company. However, your record label is likely to be most concerned about the last of these items--the copyright on the sound recording. In general terms, a record company usually owns or obtains the copyright on a sound recording through a contract with the recorded performer. In one common scenario, a label will have a band sign a contract stating that the label owns the copyrights to any master recordings the label makes of the band’s performances. This is usually accomplished by stating in the contract that the band is making the recordings on a “work-for-hire” basis. For more details, see this FAQ page on the Recording Industry Association of America (RIAA) website.
Copyright law surrounding sound recordings is complicated. Consider, for example, that:
With these sorts of facts in mind, you should strongly consider consulting with an experienced copyright attorney before you start trying to sign up performers.
For more detailed information on copyrights of sound recordings, including the process for registering those copyrights, see the United States Copyright Office’s website. For more information on piracy of sound recordings, see the website for the Recording Industry Association of America (RIAA).
At a minimum, you need to be concerned about at least two areas of risk: (1) injuries to visitors to your business; and (2) damages to business property through fire, theft, or other causes.
For potential injuries to visitors, you should obtain a good general liability policy that will protect you from visitors who slip and fall or suffer other personal injuries at your place of business.
For potential damage to your business property, make sure that you have coverage for all property of any importance, starting with your recording equipment and recordings, and also including the building, fixtures, and furniture.
For more information, see Nolo's article on Obtaining Business Insurance.
Nolo has various resources that provide more detailed information about starting small businesses, covering such issues as dealing with employees and working with business contracts. These include Legal Guide for Starting & Running a Small Business and The Employer’s Legal Handbook, both by Fred Steingold, and The Small Business Start-Up Kit, by Peri Pakroo.