Band Business Structure 101

Is your Christian Band a Business or a Hobby?

Ideally, your Christian band is a ministry that changes the lives of people around you. But, how does your bands ministry file taxes? How does your band get a bank account or credit card? Does your band pay sales tax on equipment purchases? In short, how does your Christian band function in the business world?

According to the United States Government, you have options…

So, let’s start with the first choice – Is your band a hobby or a business?

band business or a hobby
The IRS has rules to determine if your band is a business or a hobby.

Remember, we are not defining ministry or music quality here. We are simply discussing the best way to structure your bands business so that you can be the most effective at ministry. Therefore, a “hobby” is not a derogatory term; it does not mean your band is less professional in its ministry. Nor does being a “business” raise your bands professionalism or status in ministry. The goal is simply to choose the best business structure for your particular music ministry.

To make this decision the IRS uses the following questions:

Does the time and effort put into the activity indicate an intention to make a profit?

Does the taxpayer depend on income from the activity?

If there are losses, are they due to circumstances beyond the taxpayer’s control or did they occur in the start-up phase of the business?

Has the taxpayer changed methods of operation to improve profitability?

Does the taxpayer or his/her advisers have the knowledge needed to carry on the activity as a successful business?

Has the taxpayer made a profit in similar activities in the past?

Does the activity make a profit in some years?

Can the taxpayer expect to make a profit in the future from the appreciation of assets used in the activity?

Once you answer these questions, the best business structure for your band becomes clearer. Generally, an activity qualifies as a business if it is carried on with the reasonable expectation of earning a profit. The IRS presumes that an activity is carried on for profit if it makes a profit during at least three of the last five tax years, including the current year.

What is “profit”?

Let’s say you kept financial records for an entire year (January 1 through December 31). Add up all the money your band took in from performance fees, donations, merchandise sales, etc.  Then add up everything your band spent on gas, merchandise, recording, etc. Subtract what you spent from what you made and the rest is “profit”… mostly. It’s the Federal government, so of course there are loopholes, rules, and exceptions. Food, equipment, and practice space are huge issues for band expenses (which we can discuss at a later date). For today’s purposes, count only ½ of your food expenses, 1/7th of your equipment purchases, and don’t count your practice space at all unless your band actually pays rent for it. After all that – did your band make a profit?

If you do not have financial records for a year, use your best estimations of what you expect to make and spend in the next year.

Now look at the last 5 years, and what you expect to make/ spend in the next 5 years. Have you already or are you probably going to make a profit in at least 3 of those years? If so, your band is a business. If not you are a hobby.

Why should you care?

Good question… it’s all a matter of paperwork. Unfortunately, places like the IRS and your local bank care about you doing the paperwork correctly and are more than happy to charge you extra while making your life far more complicated when you don’t.  Some bands feel that they do not need to bother with this “legal stuff” because they are too small for anyone to notice. They can realistically coast along for a while, doing nothing. Until some event happens (like getting a gig that pays more than $500 from a college that wants to write a check) that requires some business documentation (like an employer ID number or social security number so they can send the band a 1099 form). Now that band has to consider either paying taxes, not paying taxes and hoping they don’t get caught,  or turning down the opportunity.  I just think it’s better to consider this issue ahead of time and make rational decisions before your band is put in a crunch situation.

How does being a hobby affect you?

Income Tax:

If your band is a hobby, band losses may not be used to offset other income. Your band creates a loss when related expenses exceed income.

For example: Let’s say you have a day job that pays $50,000 a year. You pay income taxes on that $50,000. But you also put $5,000 into the band to help pay for band expenses that cost more than the band made. You cannot deduct that $5,000 as a business expense or a charitable contribution. It is just the same as if you spent $5,000 on any other hobby like hunting or skateboarding.

If the band is a hobby, you should keep track of band expenses and income. Remember the general guidelines we used above for food, equipment purchases, and practice space when calculating your potential profit. If you see that the band is going to make a profit, be sure to alert your accountant. They can help you find more “expenses” that can count as deductions so that you do not end up paying income taxes on the bands profit. If you do still end up making a profit, you will have to pay income taxes but not self-employment tax.

The band can use one band member’s social security number and address for business purposes (like 1099 forms). Just be sure to give all the records to your accountant at tax time.

Sales Tax:

Unfortunately, hobbies pay sales tax for all items not being re-sold. So, all your equipment purchases are a little more expensive when your band is structured as a hobby than if your band was a nonprofit corporation. But, the amount of equipment you purchase probably does not justify the extra work and expense to start up and maintain a nonprofit. Other band business structures still have to pay sales tax on equipment purchases, so you are really not losing a lot here.

Collecting Sales tax is governed under state law. Every state is different. But, in general, you must collect sales tax if you are selling retail to the public. Your band merchandise is considered retail, so, bands are required to collect and remit sales tax no matter what business structure you choose. It is your responsibility to ensure that you are collecting the correct tax rate. Most states have some guidelines as to the number of shows you play before you have to collect sales tax – be aware that it is usually very low (5 or less). Check with your states sales tax office for the appropriate forms and guidelines. Most companies that sell you the products to re-sell will require a copy of your sales tax license (or at least the numbers from it) before they are legally allowed to waive the sales taxes.

Bank Accounts:

Hobbies do not need an employer identification number. But banks need that number to open a commercial checking account. They will not issue a commercial checking account to a hobby. They will, however, issue a personal checking account to members of the band.  Generally, personal checking accounts have far fewer fees than commercial accounts, so this is good news for hobbies! I recommend that you choose two unrelated members of the band to open a joint personal checking account with debit cards.

Liability:

The “You break it, you bought it” concept applies here. As a hobby, the band members have no liability protection. Do the members of the band need protection from lawsuits as a result of the bands activities? Consider your specific circumstances, but most bands feel that they do not.

How does being a business affect you?

Income Tax:

According to the IRS, taxpayers may deduct ordinary and necessary expenses for conducting a trade or business. An ordinary expense is an expense that is common and accepted in the taxpayer’s trade or business. A necessary expense is one that is appropriate for the business.

For example: Let’s say you have a day job that pays $50,000 a year. You would normally pay income taxes on that $50,000. But you also put $5,000 into the band to help pay for band expenses that cost more than the band made. You can deduct the $5,000 as a business loss, effectively turning your $50,000 income into $45,000. Your accountant should fill out the paperwork to make sure it is done correctly, but this strategy may save you a lot of money at tax time.

Sales Tax:

Like hobbies, businesses do not pay sales tax on items they re-sell (such as band merchandise).  Also like hobbies, businesses pay sales tax on equipment purchases unless the business structure is a nonprofit corporation. If your band chooses to become a nonprofit corporation, you will definitely want to take advantage of this tax break. But, I do not recommend becoming a nonprofit solely based on this one way to save money. Do your homework before you embark on this path.

Also like hobbies, businesses have to collect and remit sales taxes. Contact your states sales tax office to find out how your state handles these taxes.

Bank Accounts:

Businesses will be issued a commercial checking account from almost any bank. But fees for that account vary widely. It is not unusual to accrue hundreds of dollars in bank fees each year. (Hobbies are looking pretty good about now aren’t they?) So, shop around for your best deal. Be sure the bank has online banking options for the times that you may need access to your money while on the road. Your bank will ask for the bands employer identification number (which is found on form SS-4) and the office address (usually one of the band members agree to use their home address).

Liability:

Personal liability is one of the most important considerations when choosing which business structure the band will use.  Sole proprietors and partnerships have the least amount of protection, while corporations provide the most. But, in the end, there is no such thing as being completely not liable for your actions. For the purposes of this discussion, you need to know that you may be just as personally liable if your band is a business than if your band is hobby but you may be able to reduce the damages as a business.

I hope this helps clarify your bands business structure and give you the correct answers to tell your banker and accountant. As far as my recommendation… there is no “right way” for every band. You need to base your decisions on your personal circumstances and your bands goals. Some bands have a thriving ministry and exist for years as a hobby. While others start up right away as a business and have an equally great ministry. So, my best advice is to learn the basics, then talk intelligently to your accountant. Remember that your bands business structure is meant to enhance your bands ministry, so choose what makes the most sense for your circumstances!

If you decide that your Christian band is not a hobby, you need to set up a business structure. Not comfortable doing that yourself? Check out LegalZoom. They have on-line forms to walk you though the process and get your bands paperwork filed correctly.

The Christian Band Handbook

The Christian Band Handbook

has more information about Christian bands business structure in the chapter called Legal Stuff That Matters.

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