Licensing Artwork: Key Issues
As a small business owner, you may wonder how to expand your company and get other streams of income. This is especially true when it comes to owning an art business and wanting to showcase your artwork. If you have an art business that demands others use your work, you must know the legal concerns in licensing artwork. There are many things to consider as a full-time artist pursuing a lucrative art career.
Art licensing gets your work seen. It also gets you paid. Art licensing involves permitting others to use your artwork in exchange for royalties or licensing fees. This article addresses the key issues to consider when licensing artwork.
Intellectual Property Rights
A licensing agreement is a legally binding contract outlining the terms and conditions for another person or company's use of your artwork. A license is similar to a rental agreement. The rights of your artwork remain yours and yours alone, but someone else gets to use it because they paid you for it.
The licensing agreement should include the specific rights granted and the territory, duration, and limitations of the use. The agreement should also define how the licensee can use your artwork. The scope of use should specify the intended purpose, such as editorial use and use in commercial products, advertising, and merchandise.
Selling Artwork Yourself
If you are selling artwork yourself, you should have a business license. You can operate under a business name or your own name. You will obtain a business license from your state's Secretary of State. You may also need an occupational license from your city or county in addition to your business license. Some online retailers like Amazon and Etsy do not require a business license, but that does not mean you should not get one.
A business license allows you to operate under a DBA (Doing Business As). Artists who sell their artwork are generally considered self-employed. You can pay yourself a salary or take member draws or distributions. The IRS may require the artist to pay self-employment taxes. To determine if your art activities qualify as a business, the IRS considers factors such as time and effort devoted to the art activity, profit motive, and whether you have made a profit in similar art activities. You may need additional licensing, like a seller's permit. Consult with a local accountant in your state to understand what tax issues and licenses you may need.
Royalties and Licensing Fees
The royalties derived from licensing artwork can be substantial, especially over a long period. This depends on the “reasonable royalty rate" you negotiated and assumes the product has a steady demand. But what is a reasonable royalty rate? How can you make a deal that favors you but is still comfortable for manufacturers, publishers, and producers? There's no mystery to royalties—you've created a piece of art (writing, painting, music) that someone else wants to sell. So, you should naturally get a share of the profits. But make sure the rate you receive isn't less than favorable, or you could be giving up more rights than you think.
Industries like music, manufacturing, and publishing calculate royalties differently, but they all must honor your negotiated royalty rate. Negotiating a good royalty rate is key to the entire process. For example, if you negotiated a rate of 5% and the sales equal $10,000, you will receive $500 in royalties. Sounds simple, but is the 5% based on gross or net sales? And if there are expenses in marketing or selling the products, do they get subtracted from the sale amount?
Negotiating a Good Deal
Your relative bargaining strength, like how in-demand your work is, will determine how hard you can push for your terms. Gross vs. net sales will likely be a contention between you and the licensee. Gross sales are the total dollar amount of customer purchases. Net sales are the total amount minus certain deductions, such as taxes and shipping costs. The licensee will want the royalty rate based on the net sales. At the same time, it's most beneficial to you to establish the royalties on the gross amount.
Assuming you've agreed to base your royalty rate on net sales, you should limit the deductions the licensee can take when calculating the net sales amount. Deducting sales tax, discounts, and even shipping costs from the gross amount is customary. But keep the licensee from deducting things that are out of your control and have nothing to do with your art. Other deductions you should avoid are:
- Sales commissions
- Instances where third-party orders but fails to pay
- Any fees the licensee may try to tack on
When negotiating your royalty rate, you'll want to know the general demand for your work and the industry's going rate. You'll need to do your homework, consult with others in that industry, and find resources on licensing rates. Also, consider the royalty rate and the volume of products you expect to sell. You may negotiate a great rate, but your high rate is meaningless if the sales are low. For example, if you're dealing with a well-known brand, they may be willing to pay a lower rate. But because they sell so much volume, you'll probably end up with a greater royalty in your wallet.
The Bare Minimum: Basic Do's and Don'ts
For beginner artists, here's a crash course for what to do and what not to do:
- Only license your work if you trust the licensing company (known as the licensee).
- Research the licensing company's reputation, get information about their other clients, contact the clients directly, and find out how their operation works. There's no point in getting an excellent royalty rate from a company that is dishonest about numbers or has no experience marketing products.
- Never give up your copyright. A licensing deal is an arrangement where you keep the copyright and give another company a license to use or sell your art.
- Include a specific end date of the licensing contract. Beware of any use of the word "perpetual," as it can turn a license into an assignment.
- Be as specific as possible regarding what products your art will appear on. This could be greeting cards, t-shirts, mugs, or posters.
- Include your right to approve any company the licensee wants to sublicense your work.
- Include an indemnity clause. This way, you can protect yourself from lawsuits arising from the licensee's use of your art on a product.
- Use social media platforms to market your artwork. Marketing your art online will create a broader audience. It may attract manufacturers who want to sell your work.
- Notify manufacturers online that you are open to art licensing.
- Choose the right business entity, which is important for licensing artwork. Some business structure options include sole proprietorship, partnership, corporation, or LLC. Remember that as a sole proprietor, you are personally liable for business obligations and taxes related to licensing your artwork.
The Small Business Administration (SBA) is a great resource for artists licensing artwork. The SBA provides resources to help artists navigate additional licensing issues.
When negotiating a licensing deal or simply reading a contract offer, you may see terms you need to familiarize yourself with. One of the most common terms is "advance against royalties."
An “advance against royalties" has a two-step meaning. First, you get an advance from the licensee based on the contract. This advance is non-refundable. Second, that advance will count against any future royalties the company owes you until you reach the advanced amount received.
After that, you'll receive royalties regularly, according to the contract. For example, if the advance against royalties is $5,000, then you'll:
- Receive $5,000 upfront
- Wait for payment again until your royalties reach $5,000. You will then receive your royalties according to the percentage you negotiated
You need an auditing clause in any license agreement. If you believe there's a discrepancy between your royalty checks and what you think you're due, ask for an audit. An audit is simply an outside party inspecting the books to determine whether you're receiving your total due. Audits aren't cheap. So, including language that states the licensee will pay for audits is the best-case scenario for art businesses. A frequent compromise is that the artist initially pays for an audit, but the licensee must pay if the discrepancy is over 10%.
Get Legal Advice for Your Art Business
Trying to sell art and licensing your artwork can be confusing. Seek out the assistance of a business and commercial law attorney to help you negotiate royalties and other licensing matters.
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