How To Start an Independent Record Label
Today, the music business has many other players—besides the major record labels—influencing what people listen to and buy. It's now common for aspiring musical artists to create their own recordings and sell them online without the help of a record label.
But starting an independent record label can still be a viable and profitable small business. Most artists still prefer to work with a label for financial and logistical support. Record labels can help cover the cost of recording, production, and distribution.
So, what exactly is a record label? Is it realistic to start one from scratch? FindLaw answers that and more in this article. Learn about:
- Music distribution and promotion
- Finding talent
- Copyright and royalties laws
- Employment law
- Turning a profit
Record labels can also offer industry expertise and connections. This business can also be a valuable support system for navigating a complex industry. Is it the right business for you?
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What Is a Record Label?
Record labels are part of a very complex music industry ecosystem. Essentially, a record label:
- Finds musical talent and new artists
- Records that talent's new music
- Plugs into the rest of the industry
The goal is to get the music into the hands of listeners who will pay or see the artist perform in person.
The music industry is vast. Besides the artists, it includes:
- Streaming services
- Music directors for films, commercials, and video games
A record company guides artists through this ecosystem. For artists, achieving success in the music industry equally takes talent, hard work, and luck. Artists have a better shot at success with the right record company behind them.
The Industry at Large
- Warner Music Group
- Sony Corporation
- Universal Music Group
Traditionally, all other record labels are independent, even if they don't necessarily record "indie" music. There are thousands of independent record labels and 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 in the music industry.
Do You Have Industry Experience?
The music industry is fierce. It's filled with people trying to make money from any available opportunity. The laws are also complicated, involving:
There is also a lot of litigation in the music industry. Litigation is the legal process of resolving disputes between parties through the courts.
The music industry is not for the faint of heart or the inexperienced. You need more than drive and motivation to start a record label. You will also need industry experience or an experienced mentor.
Do You Have Legal Guidance?
In addition to seeking mentorship, you should retain the services of entertainment lawyers with industry knowledge. There are several legally binding contracts papered throughout the record industry. Some contracts your lawyer should have familiarity with include:
There are also various federal copyright and intellectual property laws in play. So, lawyers unfamiliar with this business will find it difficult to represent your interests successfully.
You can find templates online for some of these contracts. But getting a lawyer's help to fine-tune the specifics is still recommended.
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're 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 stand out. It's best to make one music genre your primary focus and expand out later.
Choose 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. Use your creative talents or collaborate 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.
Trademark Your Record Label Name and Mark
Once you have decided on a name for your record label, you must protect it. This is true even if you don't open your new label right away. First, ensure 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 register it.
Next, trademark that name and your corresponding mark with the United States Patent and Trademark Office (USPTO). It helps to hire a trademark lawyer to do this. You can then register that trademark with your state.
Structure Your Business
Your first significant legal decision is to decide which type of entity to register your business as with the state. This makes your business legitimate in the eyes of several entities, including:
- The legal system
- Banks and investors
- Potential talent
- The music industry
This decision should be a priority and made in consultation with your lawyer. Business structures all fall under state law. Unless you have experience starting companies, you will want legal advice in making these decisions.
If you're operating alone and haven't registered anywhere, your state will legally deem your business a sole proprietorship. Sole proprietorships have some significant cons. You're responsible for every bill out of your personal funds. There's also nothing in place to protect your personal assets from the debts and obligations of your business. It may be wiser to register your business as a different structure.
Most small businesses, including record labels, start as limited liability companies (LLCs). LLCs have corporate officers and incorporation papers. Under most circumstances, LLCs also keep the corporate principles from personal liability for company debts.
Suppose there are partners involved who all have the same interest in the company. In that case, 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.
Write a Business Plan
You must write a formal document detailing how you intend to succeed in this highly competitive business. This is called a business plan.
Plus, most banks and financial institutions will only lend money to independent music label owners with a solid business plan.
There are several ways you can put together a solid business plan:
- Build your business plan yourself through a reputable software program
- Work with a small business attorney with expertise in writing business plans
- Look at the business plans of other successful record companies for inspiration and guidance
- Hire a business consultant to write your business plan
Consider all options before proceeding. Look at the structures of other professional business plans. Formatting is key if you intend to use this business plan to attract investors.
Marketing is a significant part of most business plans. But the music industry treats marketing differently from any other industry.
Unless you don't intend to grow the company, you should likely hire a music marketing company. You will also need to develop a front-end look that consumers will see. This look must differentiate you from other record companies.
Most small businesses start on a budget of personal savings or income. The record business is no different. But, you will also likely 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 accounting for your record label's necessities will go a long way in obtaining a loan. Still, you may need to provide some collateral to secure your business bank loan.
Another possible source of startup costs is a neighborhood grant. You can check with local nonprofits and community organizations to see if they offer grants. You still must provide them with a business plan that fits their mission.
The U.S. Small Business Administration is a great resource for entrepreneurs to secure funding for their new businesses. SBA-backed loans can simplify the process of getting needed funding for your business.
Prepare To Hire Employees and Pay Taxes
If you're successful, you will need to hire employees at some point. If you have any income, you will need to pay taxes. A business accountant can handle these aspects of your business. But there are several things you can do to 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. Only secure your EIN directly from IRS.gov.
- Make sure employees are legally able to work in the United States. Fill out the proper paperwork to document this (an I-9 form) if necessary.
- Run comprehensive background checks on all new hires.
- Comply with all state and federal employment laws.
- File your employment taxes. This is best done by your accountant and can have serious consequences like fines or criminal charges if not completed correctly.
Depending on when you open up shop, you may not need insurance for your business right away.
At a minimum, you will likely need:
- Business liability insurance: Your financiers may set minimum policy limits.
- Worker's compensation insurance: Obtain this as soon as you hire your first employee.
- Commercial umbrella insurance: Consider this for accidents and the unforeseen.
You should contact an insurance agent when you start planning to understand what you will need and its cost.
Obtain Local Business Permits
Depending on where your offices and recording studio are, you may need to obey local ordinances. You may need:
- Local business license: You will need construction permits to build your space. You must pass fire inspections to 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.
Assuming you're renting commercial property, you'll also be subject to landlord-tenant laws.
Search for Talent
Record companies are dependent on the musical talent they sign. The ongoing search for new and emerging talent is a necessary part of the business. Unsigned artists are everywhere.
Get creative with how you seek out up-and-coming talent. Some ideas you can try include:
- Hold talent hunts in your city
- Network at local music venues
- Attend live performances and open mic nights
- Partner with music schools and colleges
- Scan self-publishing online platforms like YouTube, SoundCloud, and Bandcamp
You must have the requisite musical tastes to find artists who are the right fit to record and promote through your label.
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.
Consider enlisting an attorney for this part of the process. Be hands-on with these deals to best represent your interests. Be prepared to negotiate several details.
First, how will your artist record their music? Some artists record professional-sounding music from their laptops. Still, a professional recording studio with equipment is necessary under most circumstances.
Renting time in a recording studio is more affordable than building your own. Still, renting can be costly unless you have money to spare. Some additional questions to consider include:
- Are you advancing any other money for extra expenses?
- How are you dividing up the potential income?
- Does the artist get approval over promotional materials and recording 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.
Promote Your Talent and Distribute Content
There are two significant steps to selling talent: promotion and distribution. They go hand-in-hand, and you must do both well to make your way onto listener playlists.
You can't have advertising without distribution, or new music won't reach potential buyers. Likewise, you can't have distribution without advertising, or no one will know about your artists or their music.
Some companies specialize in one area or the other but aren't experts in both. If you get professional help with promotion and distribution, you may need to hire two companies.
Promotion and Marketing
Promotion these days can start with a social media blitz. It works well to coordinate this with a release to music streaming platforms.
You can also build excitement around your new label by selling merchandise. T-shirts, coffee mugs, hats, stickers, and other items are effective ways to promote your brand and bring in additional revenue.
There are many music promotion companies. Many of these promoters specialize in types of music, geographic areas, and more. The right promotion company for your label will depend on your business's needs, goals, and compatibility of your working styles.
Thoroughly research and select a company that aligns with your vision for your label. Carefully look at your budget, ask questions, and carefully review any contracts before committing to a partnership.
Distribution and Digital Platforms
The easiest way to release musical content today is through digital distribution. There are a variety of aggregating companies that serve as a pathway between your label and online streaming platforms.
These digital distributors help indie labels and musicians get their music on major online platforms (like Apple Music, iTunes, Amazon Music, or Spotify). You cannot upload your music directly to these major platforms. You must use a digital service to get content on them.
Some of these digital services include:
These companies charge a fee or take a percentage of the revenue generated from the music sales or streams.
Other online platforms may be useful tools for your business. For example, SoundCloud lets artists independently upload and share their music. Bandcamp allows musicians to sell and distribute their music directly to users. Bandcamp has an artist-friendly reputation for allowing musicians to keep a larger portion of what they earn from their sales.
There are also distribution companies that specifically handle more traditional media like CDs, vinyl records, or tapes.
There's an opportunity for profit in licensing your music for use in television, radio, and video games. When researching distribution companies, ensure potential collaborators connect to those industries.
Raise Business Capital and Make a Profit
Musicians and record labels make money when end-users pay to access their content. This happens when:
- Customers buy a vinyl record or other physical media
- Users stream music or music videos
- There are licensing fees (like a movie, commercial, or video game using the music)
The record label must own the copyright on the version of the song used to get paid for the music's use.
Understand the Two Types of Copyrights
Record labels and musicians make money through two different types of copyrights. These copyrights are:
- Common law copyrights
- Master copyrights
A common law copyright goes to the person who wrote the song itself. This is also called the "song" or "composition" copyright.
You don't have to register a common law copyright to enforce it. You do have to be able to prove ownership. But you can register your songs with the U.S. Copyright Office through the Performing Arts registration form. Registering allows you to secure attorney's fees and damages.
The recording company (or the musician if the music is self-recorded) owns the master copyright (also called a “sound recording" copyright).
Both types of copyrights can be a source of royalties.
Income Through Royalties
Anyone who wants to play copyrighted material must pay royalties to the business owners on both copyrights. There are two primary types of royalties you will need to know: mechanical and performance.
Mechanical royalties are paid when music (either digital or physical media) is sold. This includes:
- Physical media sales (like CDs and vinyl)
- Digital streaming
- Song downloads
Today, mechanical royalties cover most streaming. Mechanical royalties are also paid when another artist covers and releases a song.
In the United States, the Harry Fox Agency and the Mechanical Licensing Collective (MLC) collect and distribute mechanical royalties.
Performance royalties are paid whenever the music is played in public. This includes:
- Radio play
- Movie and videogame soundtracks
- Commercial use (like in a restaurant, bar, or at sporting event)
- Streamed publicly through a platform like Spotify or Apple Music
In short, when others play the music you created and distributed, you and other rights holders collect royalties and get paid.
As of 2021, the Music Modernization Act added wrinkles to copyright law. You will need a lawyer to decipher these new regulations and how they affect you and your business.
Need More Help? Talk to an Attorney
Before you start your new business, consider talking to a business formation attorney. An experienced attorney can guide you through this very complex process. They will help you navigate complicated legal aspects of starting your record label, including contracts, copyrights, employee law, and more.
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