How To Open a New Record Label in 13 Steps
Getting signed to a label and riding your music to the top is the dream of every unsigned musician. It's not unlike the dream of someone who wants to start a record label: get a great band or singer and work hard to promote them to the top of the industry.
There was a time when the record label business controlled the music industry. But that was a while ago. The music business has any number of other players now influencing what people listen to and buy—including the fact that anyone can now make a passable recording and sell it online through several music services.
So, in the 21st Century, what even is a "record label?" More importantly, do you have what it takes to start one? FindLaw provides the answers so you can make an informed decision!
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What is a Record Label?
Record labels are part of a very complex industry ecosystem. Essentially, a record label finds talent, records that talent's new music, and then plugs into the rest of the industry, getting that recording into the hands of listeners who are willing to pay to listen to it, see that act in person, or see the artist perform on video.
The music industry is vast; including publicists, distributors, venues, streaming services, and music directors for films, commercials, and video games. A record company guides artists through this ecosystem. For artists, achieving success in the music industry takes equal amounts of talent, hard work, and luck. With the right record company behind them, achieving that success can be made easier.
The Industry At Large
The record industry is dominated by three major corporations, usually referred to as the "Major Labels:" Warner Music Group, Sony Corporation, and the Universal Music Group. Together, these three corporate behemoths generate approximately 66% of all music sales.
Traditionally, all other record labels are called “independent," even if they don't necessarily record “indie" music. There are thousands of independent record labels, but there are also thousands of unsigned musicians without record deals. The industry is always looking for new talent in all genres. If you can discover new talent and deliver that artist's content to an audience, there will be room for you somewhere in the music industry.
Do You Have Industry Experience?
The music industry is fierce. It's filled with people trying to get money out of any available opportunity. The laws are convoluted, involving contract laws, copyright laws, trademark laws, lots of litigation, and more.
The music industry is not for the faint of heart or the inexperienced. If you have the drive to start a record label, you need either industry experience yourself or serious mentorship.
Do You Have Legal Guidance?
In addition to seeking experienced mentorship, you must retain the services of entertainment lawyers with knowledge of the business. There are many kinds of legally binding contracts papered throughout the record industry. There are also various federal copyright and intellectual property laws in play—meaning that lawyers unfamiliar with this business will find it difficult to represent your interests successfully.
1. Decide What Kind of Record Company You Want To Run
If you're an unsigned musician, one option is to start your own record label. It will be easier to find distribution and public relations deals if you have a catalog of music to draw from and not merely a single song or record.
If you are starting a label and want to sign a collective of musical talent, decide early on what kind of talent and genre of music you want to feature. You will need to find a musical niche to get everyone's attention. Starting out, it would be best if you made one genre of music your primary focus and expanded out later.
2. Decide on a Business Name and Look That Fits Your Music
You know your musical vision better than anyone – find a business name that expresses that vision in a word or two. Make it short but memorable. Utilize your own creative talents or collaborate with others to develop a visual design and logo (mark) that goes with that name. Find a look that caters to the aesthetics of the musical genres you'll be working in.
3. Trademark That Name and Mark
Once you have decided on a name for your record label, you should protect it, even if you will not open your new business for some time. First, make sure that the label name is available as an internet domain name. This is the first step in web development.
Then visit your state's Secretary of State's website to see if the name is available, and then register it.
Next, trademark that name and your corresponding mark with the United States Patent and Trademark Office (USPTO). You should hire a lawyer to do this. You can then register that trademark with your state.
4. Structure Your Business
Your first significant legal decision will be to decide which type of entity to register your business as with the state. This makes you “real" in the eyes of the law, banks, talent, and the music industry at large.
This decision should be high on your priority list and made in consultation with your lawyer. Business structures all fall under state law. Unless you are experienced in starting companies, you will want legal advice in making these decisions.
If you're operating by yourself and haven't registered anywhere, your state will legally deem your business a sole proprietorship. Sole proprietorships can be dicey. Not only are you responsible for every bill out of your personal funds, but there's nothing in place to protect your personal assets from the debts and obligations of your business. It would be best to register your business.
Most small businesses, including record labels, will start as limited liability companies (LLCs). LLCs have corporate officers, incorporation papers, and, under most circumstances, keep the corporate principles from personal liability for company debts.
If there are partners involved, particularly if they all have the same interest in the company, you may want to form a partnership. It's also possible for the partnership to form an LLC. Legal entities can be flexible and structured to suit your needs, so speak with your attorney about options.
5. Write a Business Plan
It will help if you put in writing how you intend to succeed in this highly competitive business. This is called a business plan.
Plus, no bank will lend you money as an independent music label owner without a business plan.
Several software programs will allow you to build your business plan. Your attorney may also be able to help you with this. You could even look at the successful business plans of other record companies or pay a consultant to write one for you. Consider all options before proceeding, and make sure to look at the structures of other professional business plans. Formatting is key if you intend to use this business plan to attract investors.
A significant part of most business plans is marketing. However, the music industry treats marketing differently from any other industry. You will probably be hiring a music marketing company—unless you don't intend to grow the company. You will also need to develop a frontend look that will be seen by consumers. It's essential that this look be different from other record companies so you stand out.
6. Seek Financing
Most small businesses start on a budget of personal savings or income. The record business is no different. But, if you want to be successful, you will probably need some money from outside financing.
Financing is where a detailed business plan pays off. The primary source of funding for a small business is a loan from a local bank. A business plan that accounts for your record label's necessities will go a long way in obtaining a loan. Still, it would be best also to provide some collateral to secure your business bank loan.
Another possible source of startup money is a neighborhood grant. You can check with local nonprofits to see if any of them offer grants, but you will have to provide them with a business plan that fits their mission.
7. Prepare To Hire Employees and Pay Taxes
At some point, if you are successful, you will be employing people. And if you have any income, you will be paying taxes. Much of the paperwork around those two business factors should be done by your business accountant. However, there are several things you can do that will help keep your affairs in order:
- Obtain your federal Employer Identification Number (EIN) from the Internal Revenue Service (IRS). Do this as soon as you register your name with your state or on the internet.
- Make sure employees are legally able to work in the United States. Fill out the proper paperwork to document this, called an I-9.
- Run background checks on all new hires.
- Comply with all state and federal employment laws at the worksite.
- File your employment taxes. This is a job for your accountant, and it's an area that can get you into a lot of trouble if you mess up.
8. Get Insured
Depending on when you open shop, compared with when you start looking for funding and talent, you may not need insurance for a while. But you should contact an insurance agent at the beginning to get an idea of what is available and what it will cost to work into your business plan. You will need:
- Business liability insurance. Your financiers may set minimum policy limits.
- Worker's compensation insurance. Obtain this as soon as you hire people.
- Commercial umbrella insurance. Consider this for accidents and the unforeseen.
9. Obtain Local Business Permits
Most of the laws you will need to deal with are federal and state copyright laws and state contract laws—something your lawyers will handle. But, depending on where your offices and recording studio are located, you may run into local ordinances to comply with. You may need:
- Local business license. You will need construction permits if you are building your space out and must pass fire inspections and receive a certificate of occupancy.
- Sales/use tax license. Depending on the jurisdiction, you may need a sales/use tax license or a sign permit.
You'll also be subject to landlord-tenant laws, assuming you're renting commercial property.
10. Search for Talent
Record companies are dependent on the musical talent that they sign. A necessary part of the business is the endless search for new and exciting talent. Unsigned artists are everywhere, but it will be up to you to have the requisite musical tastes to find artists that are the right fit to record and promote through your label.
Hold talent hunts in your city. Ask around to local musicians and venues. Scan self-publishing music sites online where musicians get their music out to listeners.
11. Sign Talent and Determine Cash Flow
After finding the talent, you must negotiate with them and sign a contract. The agreement must be fair to all parties and should be in writing. Always put your deals in writing no matter what, even if the talent is your best friend.
It would be best if you enlisted an attorney for this part of the process. Be hands-on with these deals to make sure your interests are represented; several details will need to be negotiated.
First, how will the music be recorded? Some artists now record professional-sounding music from their laptops. Still, a professional recording studio with equipment is necessary under most circumstances. It is more affordable to rent time in a recording studio as opposed to building your own. Still, renting can be costly unless you have money to spare. Some additional questions to consider:
- Are you advancing any other money for additional expenses?
- How are you dividing up the potential income?
- Does the artist get approval over promotional materials and costs over a certain level?
- Can the musician's accountant audit the books?
- How long do the parties intend to participate in the deal?
- How many albums must the artist record in that timeframe?
Once all parties agree and sign the contract, your record company will have its first official deal with a recording artist.
12. Promote Your Talent and Distribute Content
There are two significant steps to selling talent: promotion and distribution. They go hand-in-hand, and you need to do both well in order to make your way onto listener playlists.
You can't have advertising without distribution, or the new music won't get the buyers. Likewise, you can't have distribution without advertising, or no one will know about it. Some companies specialize in one area or the other, but still have knowledge in both. Find your knack but don't overlook any blind spots.
Promotion these days can always start with a social media blitz, coordinated with a release to a music streaming platform such as Apple Music or Spotify.
There are tons of music promotion companies. Many of these promoters specialize in types of music, geographic areas, etc. Research the best potential collaborators.
The easiest way to release musical content today is through digital distribution. There are a variety of aggregating companies that serve as a conduit between your label and online streaming platforms.
If you are printing CDs, vinyl records, tapes, etc., there are also any number of distribution companies that specifically handle those media.
Take note; there's potentially a lot of money in licensing your music for use in television, radio, and video games. When researching distribution companies, make sure potential collaborators are connected to those industries.
13. Raise Business Capital
Musicians and record labels make money when an end-user pays them. This could be someone buying a vinyl record, someone streaming music, or the music used in a movie, commercial, or video game.
For the record label to get paid for the music's use, they must own the copyright on the version of the song that is used.
Two Types of Copyrights
Record labels and musicians make money in two different ways, via two different types of copyrights. These copyrights are "common law" copyrights, which means they do not have to be registered to be enforceable, so long as the copyright holders can prove their ownership. However, songs can be registered with the US Copyright Office through the Performing Arts registration form.
The first copyright goes to the person or people who wrote the song itself. This is called the "song" or "composition" copyright. The recording company (or the musician, if the music is self-recorded) owns a second type of copyright called the sound recording, or "master," copyright. Both of those copyrights can be the source of royalties.
Income Through Royalties
Anyone who wants to play legally copyrighted material must pay royalties on both copyrights to the owners of those copyrights. Royalties used to be paid by the sellers of media (such as records or tapes) in what are called "mechanical" royalties. They were called this was because the production of the material was performed by mechanical means.
Today, mechanical royalties also cover some streaming. Mechanical royalties are also paid when a song is covered and released by another artist. In the US, mechanical royalties are collected and distributed by the Harry Fox Agency and the Mechanical Licensing Collective (MLC).
Performance royalties are paid whenever the music is played in public. This includes streaming, radio play, movie and videogame soundtracks, and commercial use. Performance royalties are collected and paid by performing rights organizations like ASCAP, BMI, and SESAC, which generally don't collect mechanical royalties.
As of 2021, the Music Modernization Act added additional wrinkles to copyright law. You will need a lawyer to decipher these new regulations and how they affect you and your business.
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