All successful musicians incorporate. It is really a question of “when” rather than “if”. The benefits of incorporation are huge, and the risks of not incorporating are bigger. Let’s examine why.
Why Should Musicians Incorporate? The Benefits
i) Tax Benefits
If you have not incorporated and are playing music as an individual or group, you are a operating as a sole proprietorship or partnership by default. So all revenue earned in theory is divided amongst the proprietors or the partners in the partnership. As such, this income will be added to any income you make personally, in your “day job”. So as the band or artist gets bigger and the revenue being generated starts to become significant, it will bump each of the members’ income to a higher tax bracket.
The highest tax bracket in Canada is 29%. By comparison, the corporate tax rate for Canadian-controlled private corporations claiming the small business deduction is 11%. As you can see, the benefits in tax savings along can be quite significant. Once incorporated, all revenues generated by the artist can be flown through the corporation, and perhaps more importantly, all expenses related to the generation of those revenues can be deducted therefrom. The net result can be what separates the starving artist from the comfortable one.
ii) Limited Liability
The members of a sole proprietorship or partnership are personally responsible for all debts and liabilities of the business. In other words, as an unincorporated artist or band, if you are ever sued, each member will be personally responsible for the outcome of the lawsuit. In a sole proprietorship or general partnership, owners and the business are legally considered the same—leaving the personal assets of the members vulnerable. For example, if someone were to be injured at your concert, in theory that injured person could come after your house and car to rectify their damages. Or more likely, if the band gets in too deep with creditors, those creditors can pursue the personal assets of any member of the band.
So the second major benefit of incorporation for musicians is that the shareholders of the corporation are shielded from liability for the debts and liabilities of the corporation. Creditors cannot pursue the personal assets (house, savings accounts, etc.) of the owners to pay business debts. This is perhaps the most important advantage of incorporation.
When Should Musicians Incorporate?
So the question becomes when should musicians incorporate and not if. I like to tell artists that once their annual gross income is around $30,000 CDN, it makes sense to incorporate. It typically costs around $1000 in Canada, plus filing fees.
From there, you simply take the corporate documents to your bank to set up a business bank account, and start running all revenue and expenses through the company rather than through you personally.