Why You Might Want to Start a Record Label

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If you’re a musician or composer, this might be an extremely opportune time to get involved in the recording industry, despite the many problems currently plaguing it. Why do I say this? Because, with the exception of the early 1950s, it’s never been easier.

As the major multi-nationals combine and contract, they run the risk of turning into black holes, gaining extreme critical mass but without the attendant sales. In short, they’ve become so large and unwieldy that they constantly have to fire “excess” personnel, yet their profits don’t seem to rise accordingly. You might therefore contemplate a relationship with an established independent label that releases music compatible with yours. There are several excellent Indies earning modest profits, and many are run by good, honest people. Labels that release some music by contemporary American composers include Albany, Bridge, Koch, Naxos, New World, Nonesuch (my old alma mater which, although owned by a major, operates pretty much like an independent), Reference, and Telarc.

However, in this age of do-it-yourself, now is a great time to consider starting your own label. The cost of entry is comparatively modest, and the process is not too complicated.

First, if you’re really sure you want to establish your own company, come up with a unique label name. You should do a Google search to be sure it’s not in use, and also check the web site of the U.S. Patent and Trademark Office (800-786-9199). My grandfather once suggested—tongue only partly in cheek—that one should choose a name whose first letter is near the front of the alphabet, since many accountants pay their bills in alphabetical order. Thus Aardvark is likely to get paid quicker than Zorro. Once you’re in business you should register the name with the same office.

You’ll also want to secure a domain name, whether it’s your own name of the name of the label, which might be preferable. You can check availability of the preferred name by doing a “whois” search. Then go to an Internet registrar with whom you can register the name.

If you’re going to be signing any other artists, or if you’ll need to have contracts drafted, you should interview and then retain an attorney familiar with the legal ramifications of the music industry. You should also read All You Need to Know About the Music Business by Donald S. Passman. This frequently revised and updated book is easy to read despite its topic, because Passman writes in a very relaxed, conversational style.

You should also confer with your attorney and accountant as to the best legal structure for your label. Should it be a Sole Proprietorship, Partnership, an LLC (Limited Liability Corporation), a Subchapter S Corporation, or something else? Your decision will be based mostly on the extent of personal liability you might be exposed to, and the tax advantages or disadvantages that best suit your circumstances.

Briefly, a Corporation is a legal entity and is the most complex and the most expensive business to set-up. It might not be the appropriate choice if you’re going to be predominantly self-financed, are flying solo, or have only one or two partners. On the other hand, in areas other than fraud, it provides you the greatest protection from liability. You establish a corporation at the state level, but the rules vary with each state. Because it’s a business entity, a corporation files its own tax returns.

A Subchapter S-Corp is also a legal entity, is somewhat easier to establish, and will shield you to some extent from personal liability. It requires that regular reports be filed with your state. Profits and losses from an S-Corp flow through proportionately to the personal tax returns of the shareholders who control it. It also requires that if a shareholder works for the company, and if there’s a profit, he must pay himself wages that are comparable to normal such salaries for the position, the type of business, and the geographical region.

In both instances, since the corporation is an entity and not a person, going bankrupt doesn’t affect the personal assets of its officers.

A Partnership is a business with more than one participant that has not filed formal papers with a governmental agency. It’s simple to construct and maintain, but the business owners are personally liable for debts, lawsuits, etc. Although it’s not necessary to have a contract between the partners, it’s a good idea that there be one which specifies responsibilities and ownership, what happens if there’s a major disagreement between them, and how to divide the assets if the partnership is dissolved.

A Sole Proprietorship is the cheapest to set up and the easiest to organize. You are free to make your own decisions or mistakes, receive all income to keep or reinvest, and profits flow through to your personal tax return. Typical employee benefits such as health insurance are not directly deductible from your business income. The biggest drawback is that it offers no protection from liability, and going bankrupt will affect your personal credit status.

A Limited Liability Corporation is somewhat similar to a partnership. It can be established by one or more shareholders and has certain tax advantages. Most important, it provides the liability protection of a corporation. It’s somewhat more complicated to establish than a sole proprietorship, but is a lot easier than an S-Corp or C-Corp.

Presumably you already have some kind of office, whether it’s in your home or elsewhere. This is likely to be sufficient, at least for the early days, as long as you have reliable access to a computer, printer, phone, fax, copier, and the Internet.

I strongly urge you to write a business plan, even if you’re the label’s sole form of financial support. The process of constructing the plan will force you to think over and make many decisions about your label—its size, the genre of music, how you’ll operate, etc. It’s also imperative that you develop a comprehensive budget, at least for the first year of operations, although I encourage you to project a year or two further. A well-structured business plan will assist you in raising funds, but more importantly, it will be the roadmap for how you’ll operate.

There are a number of books on the subject as well as a great deal of software to assist you. A Google search for “business plans” revealed hundreds of web sites on the subject, many with sample plans and outlines. If you decide to purchase business plan writing software, be sure it conforms to your unique label and what you want to achieve with it. Not all “canned” plans will work for the record industry, in fact probably very few will. Make use of the ideas and formats, not the content.

But whatever tools you decide on, be sure that you cover your subject extensively yet not exhaustively. Some business plans are extraordinarily lengthy, detailing every conceivable circumstance of the company’s operations. And although I think your internal operating plan should be comprehensive, the business plan shouldn’t be so long that it’s unlikely to be read thoroughly by potential investors. Fifteen to thirty pages should be more than enough, and in some circumstances ten to fifteen may be sufficient.

Also bear in mind that the document will vary depending on the type and size of record company you want to build. For example, if you’re not planning to seek outside funding, it’ll primarily be used as your road map and can be fairly brief. However, if you’re planning to raise money from family, friends, or independent investors for a somewhat more substantial label, it’ll need to reflect more of the business and mechanical aspects of the label’s operation. Finally, if you need to raise substantial capital, it’ll have to be considerably more comprehensive.

And don’t be afraid that someone’s going to steal your ideas. Other than talent, not much new has happened in the last few decades in regard to how record companies operate. So you’re unlikely to be ripped off by showing your business plan to interested parties. Chances are nothing you’ve come up with will be enormously revolutionary.

Check with your attorney as to whether you’ll need a business license. It’s usually a matter of local statutes, which he should be familiar with.

You should also consult with a qualified accountant, preferably a CPA. She can help advise on the legal structure—tax wise—and can help you set up your books, for which you’ll need a simple accounting program such as Quicken.

After you’ve set up this basic infrastructure you can start working on the first recording. Budget it carefully to avoid expensive surprises, and wherever possible, try to contain costs.

You can duplicate CDs one by one in your own computer, or buy a relatively inexpensive duplicator. But, better still, use the services of an independent pressing plant to manufacture CDs. Many of these suppliers can also print the graphics, or you can use a local printer. Just don’t manufacture more than you can afford and are reasonably certain you can sell.

So once you’ve got your first recorded project, how will you go about selling it? Other than raising start-up funds, this is probably the most difficult and critical part of establishing a label.

And this involves marketing, about which many whole books have been written. The role of marketing is to encourage purchases of your music through media awareness—publicity, radio airplay, print and radio interviews, etc. It’s much easier to say than to do, and requires a thoughtfully developed marketing plan. It’s not necessary that you do this by yourself since there are many excellent independent marketing experts available for moderate fees.

Be sure to launch a web site. It needn’t be complex, but it must contain the salient facts about the label and its recordings. Make short, highly compressed samples of the music available for people to listen to using at least one of the RealAudio, QuickTime or Windows Media players. Display the cover art. If you’re a touring artist—strongly recommended for all musicians—post performance itineraries and photos.

Certainly make it possible for interested customers to buy your music from your site. There are many excellent companies who offer online “shopping cart” services at modest fees that can handle the process. You might also want to make your music available for sale at Amazon.com. And without fail, sell your records at all performances, showcases, etc. Until you’ve amassed a few titles, you can make your CDs available for purchase at CD Baby.

In order to commercially distribute a CD, whether through CD Baby, Amazon, or one of the larger distributors who specialize in recordings, it’s essential that you print a valid UPC bar code on the back of the package. CD Baby can supply one, or you can apply for your label’s unique UCC membership number from the Uniform Code Council. However, this will set you back about $750.

The UCC will supply you with your leading and next five digits and you will supply the rest of the catalog number. Let’s say for example that the UCC supplies you with 099999. Your first release might then be 09999-91001-29.


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Note that in the above example the catalog number (five digits) begins with the last digit that you get from the UCC: a nine. The next four numbers can be anything you want, but it’s best that you create a sequential set starting with 1001. The number after the second hyphen is the product configuration number. For example, 1 stands for LP, 2 for CD, 4 for Cassette, 7 for vinyl singles, etc. The final number, a small 9, is a check digit and is usually created by the bar code software that you or your designer should have. The very first number, in this case a zero, is a number system character, and is supplied by the UCC.

If you buy one of the bar coding programs you won’t need to order special film for each new release. Look for software that draws bar codes in the “UPC-A” format that is the one used by the record industry. You should also be aware that the music industry might change to a 13-digit number in the next few years, so try to buy software that anticipates and can handle such a change.

Once you’ve got three or more titles under your belt, you might consider making a deal with a qualified independent distributor whose primary function is to get music through the supply pipeline to retail customers. You’ll still have to do the bulk of the work though. Such distributors include Allegro, Alliance, City Hall, Koch, and Navarre. Do your homework by talking to colleagues and requesting recommendations. Then do some Internet research to see which distributors are handling labels most like your own. Call them up and later send them sample CDs, but let them know you’re doing so, otherwise they’re liable to get tossed into the round file. Follow up by asking what they think of your music and what they think they can do for your label.

There are quite a few Web sites that can offer your music for downloadable sale. Apple’s iTunes Music Store, RealAudio, and Wal-Mart are examples, and more services are emerging weekly. Just be sure you know who you’re dealing with, and don’t sign any contracts without consulting with your lawyer.

How much time and effort any of this will take is up to you, being a matter of how intensely you’re willing to be involved. The more you’re prepared to do, the more you’ll learn, and the less it will cost. It all depends on your goals as a composer and how much a concerted effort can enhance and support your career. However, time spent developing a label to further your music will take time away from writing. So you’ll need to strike a balance that works for you.

Success in starting a label is not guaranteed, but if you keep the costs under control, there’s little to lose, but much to gain.

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Keith Holzman is the principal of Solutions Unlimited, a management consulting firm specializing in the recording industry. He was President of ROM Records, Managing Director and Executive Vice President of Discovery Records, Senior Vice President of Elektra Records, and Director of Nonesuch.

He is also the author of the newly published book The Complete Guide to Starting a Record Company, a primer that takes readers by the hand and guides them through the many steps involved in building an independent record label. It’s available exclusively at http://www.recordcompanystartup.com.

Keith can be reached by email at: Keith@HolzmanSolutions.com.