Transformers - More To Your Organizational Form Than Meets The Eye

If you're forming up a new organization, you've probably wondered what form to use. Corporation? Limited liability company? Limited Partnership? S-Corporation? General Partnership? It can be a confusing landscape to try and navigate. Each has their pros and cons and though I often tell entrepreneurs to uses the LLC form, there are some up front costs with an LLC that may make it prohibitive. This is especially true for entertainment groups, especially musical bands. The good news is, however, that you don't have to choose up front. In fact, most entertainment working groups can get most of the protection and structure that they'll need up front by simply forming a general partnership, and then later transforming that organization into a more formal business form once there's adequate financing and reason to do so.

General partnership do not actually require any legal action with the state to exist. In fact, any group doing business together is presumed under the law to be a general partnership if no other structure or form exists. So, even if you've done nothing, congratulations, you have a general partnership. This comes with a whole set of default provisions which will govern partnership activities, but they're extremely broad and general, and will to do little to reflect your actual business relationship. So one of the the most important things you can do is to draft a Partnership Agreement which actually is customized for your business group. This can address everything and anything you can imagine, from profit distribution to dissolution and from ownership of partnership assets to voting procedures. There are forms available online - but if you've been reading this blog long enough, you know that those are typically not a good idea. You can often get one drafted by an attorney for a fraction of the cost of setting up an LLC or corporation - and you won't have to worry about one-size-fits-all forms that you overpay for online or the mostly useless default provisions provided by law.

So what's the big deal about incorporating or forming an LLC, if you can set up all the business provisions with the partnership? Well, limited liability is the biggest difference perhaps the most important. One of the biggest reasons for forming a company is to insulate the owners of that company from liability for actions of the company or its employees - and with a general partnership you simply don't get that protection. Of course, when you're starting a band, you really don't need liability protection; you don't have employees, you don't do much besides make your music and there's really not many ways the group even generate liability - outside of how they'd be doing it as individuals.

The other good news: transformation is easy; like single form and fee easy. The Secretary of State has actually compiled all the information about applicable forms and fees into an easy to read chart:

California Secretary of State Conversion Information

To go from a general partnership to a California LLC will cost you $70 (in addition to any filing service fees) and will require you to fill out the LLC-1A form. Of course, there are the other matters that normally accompany forming an LLC (including drafting the Articles, Operating Agreement and other ancillary documents as well as the payment of minimum tax [$400]), but the conversion part is no more painful than if you were simply forming the LLC from scratch. As always, it's best to get an attorney to help with these formations - especially with the drafting of those documents that will govern the operation and management of the company. But if you're ready to finally make the move from a GP to a more formal entity, legal fees are probably the least of your worries.

So remember, transformation/conversion is always an available option and can save you a ton of money up front.