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Running Your Own Record Label: Part 1

On The Record By Tom Flint
Published September 2002

With record industry cutbacks all round, the prospect of success with a major record label seems more remote than ever for most musicians. So why not start your own? Many of us think about it, but what would you actually need to do? Our new series tells you...

It wasn't so long ago that home recording was a very expensive business beyond the reach of most musicians, but now affordable technology, like that featured in SOS each month, offers us all the opportunity of making release-quality records in a project studio. Many people who have self-produced a record ask themselves why they shouldn't release the record on their own, instead of trying to get another party interested. There are attractive reasons for the DIY approach, such as keeping artistic control and retaining copyright of your recordings and songs (as we'll see, there's an important difference between the two). Then there are new incentives, like the possibility of distributing and selling on the Internet.

ON THE RECORD header artwork.For those choosing to go it alone, having a good recording or commercial song is just the beginning of the process, albeit perhaps the most important starting point. But from there on, DIY record releasing is a game of business management, promotion, marketing, selling and negotiating. If you look carefully at any of these subject areas, you will find that there are people and organisations who specialise solely in one of these disciplines as full-time jobs — and by releasing your own records, you may take on the roles of all of these people. You may already have done the jobs of songwriter, musician, arranger, engineer, producer and mastering engineer to create your recordings, but as a record-label owner, you will find yourself with plenty of other work to do.

This series will be looking at the business of setting up your own record label. As you can probably imagine, there are a million ways to do things, and many of your decisions will depend on who is involved in your project, and what you are trying to achieve in the long run. With the help of several case studies, we will look at what you need to know and what you should be wary of, leaving you with the basic knowledge needed to get started. Principally, though, this series is aimed at musicians and songwriters intending to release their own work, rather than at the businessman intending to release the music of others. The other caveat to mention is that most of the advice in the series relates to how things work in the United Kingdom — if you're based in the US or elsewhere, you may find that other practices and laws apply which affect how you go about setting up your label — so beware!

Songwriters & Artists

The first thing to establish and understand is the basic structure of the industry. The diagram on the left below is a simplified plan of the industry, showing the relationships between various organisations and main players like record companies and publishers. As we continue through this series, we will talk about the most important players featured in this diagram in more detail, but before going any further, there is one very important point to make clear, and that is the differentiation between publisher and label — a distinction which is not always fully understood. Although we will discuss the roles of both in more detail later, for the purpose of introducing a few basic concepts, it is necessary to briefly explain the two here.

A diagrammatic representation of the music business as it relates to a record label, with an indication of income flow.A diagrammatic representation of the music business as it relates to a record label, with an indication of income flow.

Simply put, an artist earns money from the purchase and playing of their recordings, while a songwriter earns money from the recording and playing of their songs. The publisher is the person who deals with the rights of songwriters, whereas the label deals with the rights of artists. It may be the case for you that both writer and artist are one and the same person, but publishing and recording still remain separate issues, and as you will see, some people decide to run their own label and do their own publishing, while others sign to a third-party publisher.

Separate though they are, publishing and recording are intrinsically linked, simply because every recorded song has a songwriter. Consequently, the publisher is constantly dealing with labels, and labels are constantly dealing with publishers. It's also true that releasing your own records rarely means that you will be acting without the use of some kind of record label or publisher. Perhaps the label will be your vehicle for creating the products, after which you will let a publisher take hold of the rights to your songs. Or you may just need to sub-publish and license your music and records for overseas distribution. You might even decide to keep your publishing, but get another record label to sign you to take advantage of the cash advance and promotional clout they can offer. However you cut it, if you have any kind of success, you will come into contact with publishers and record labels at some stage, even if it's because other artists on other labels are keen to record your songs — or, in this day and age, to sample your recordings.

You will also notice from the diagram that the publisher and label stand between you (as artist/writer) and certain organisations, the main ones here being the MCPS, PRS and PPL. These are collection agencies, who gather royalties from the exploitation of recordings and public performance of recordings. A DIY label will have to deal with these organisations directly. We'll look at how that works later in the series.

Small Print, Big Problems

It is not uncommon for people to sign deals without giving enough thought to what they are getting themselves into. Toby Marks, the creative force behind Banco De Gaia, now runs his own label, Gecko Records, but his entry into the industry was from a position of naivety, which luckily didn't cause him too many problems... at first! "Initially, I had a few tracks on a Beyond Records compilation, but I was quite fortunate that the guy who ran Beyond Records, Mike Barnet, was decent and honest, because I never asked for any paperwork! He just said he was putting together a series of compilations and was looking for tracks, and that after all the costs had been covered it would be a simple 50/50 profit-share split between the label and the artists. It seemed fine to me, and we didn't even put it in writing until I signed a deal with the Planet Dog label. They asked me to confirm my arrangement with Mike so that they were clear about any obligations. The point was that I hadn't thought about contracts. I was so pleased to have someone wanting to release my stuff that it seemed like a minor detail to worry about paperwork. It is easy to get carried away and excited by the opportunities, but don't ever get bamboozled and don't listen to people who tell you that you don't have to worry about contracts, or that it's all straightforward and totally normal. You should always get professional advice, especially if you're entering into a situation for the first time."

Toby Marks, the man behind Banco De Gaia and now the owner of his own label, which markets and sells all his recordings.Toby Marks, the man behind Banco De Gaia and now the owner of his own label, which markets and sells all his recordings.Unfortunately for Toby, although he'd learnt enough to have his deal with Planet Dog checked by a lawyer, it still lacked something called a 'reversion clause' (explained by Penny Ganz elsewhere in this month's article) which, as he found out the hard way, would create significant problems later on when he wanted to take control of his own work as Gecko Records.

"Planet Dog had an exclusive licensing deal with another company, Ultimate Records. The reason for this was that Planet Dog had been set up by an experienced live club promoter, but he didn't have experience running a label. Ultimate, on the other hand, were a well-established Indie label, but they knew sod-all about dance music. So Planet Dog functioned as the dance A&R department to Ultimate, and in return, they could draw on all the resources of a well-established label. Finally, Ultimate also had an international licensing option with A&M Records, which meant that A&M had first choice on anything they wanted to license outside of the UK.

"When I signed the deal with Planet Dog, I got legal advice, which in retrospect wasn't as good as it could have been, supposedly from a very competent music lawyer. I was told that it wasn't a particularly good deal, but that it was only for three albums, and you have to weigh up how much you want to get the deal, how much you want to have your stuff released, whether you have any other options, and so on. Negotiating any deal tends to be a matter of both sides deciding what they are prepared to let go. I was so excited to get a three-album deal that I conceded a few points which I didn't think would matter. And there was the huge issue of what would happen if Ultimate went bust, which I never dreamt would happen, let alone five years later. In the case of the liquidation of a record company, I think a reversion clause should be standard in a contract from an artist's point of view, so that if an artist licenses their work to a company who then go out of business, they get those rights back. In my case, Planet Dog had licensed to Ultimate, so when Ultimate went bust, all my stuff was lost in their liquidation.

"Planet Dog did have a liquidation clause in their licensing deal with Ultimate, but it proved to be ambiguous. When Ultimate went bust, the first thing that should have happened was that those rights reverted to Planet Dog, but it took two years for the courts to decide that the clause did stand. The rights should have reverted to Planet Dog straight away — and of course there's no compensation for those two years. In my case, because Planet Dog hadn't gone bust, I couldn't get the rights from them, but Planet Dog were prepared to sell them back to me, which is what eventually happened. The irony is that my deal was signed with Planet Dog, who have never gone out of business!

"If you're signing to a label, my advice would be, firstly, to get your contract checked out by someone who knows what's what, and if you think that there is any chance of that company going bust while they hold the rights to your records, make sure there is a clause in there that states unequivocally, in totally unambiguous language, that in the case of liquidation or ceasing to trade, 100 percent of all rights revert to you without any delay. Of course, you may find the record label saying they can't agree to that, and then you have the usual negotiating problems.

"The best insurance is to invest money in good legal advice, follow it and don't think you know best. Be clear about the decisions you are making, because there are a lot of areas that are open to debate."

Going Legal

In the meantime, there are some important planning stages which you would be wise to consider before starting your label. Although releasing records may seem far removed from running a corner shop or garden centre, a record label is still a business venture, and as such requires income and expenditure accounts by law, and dealings with entities like the much-feared Inland Revenue. You may even have to cope with VAT returns if your turnover is beyond a certain amount (for more on these terms, see the box later in this article), and these, along with other important issues like National Insurance contributions and annual tax returns, will demand a significant degree of organisation and planning. There will be more on how to handle these matters in future parts of this series.

Music industry lawyer Penny Ganz.Music industry lawyer Penny Ganz.Initially, you will need to establish a structure for your business. The choices you make will depend on what you decide to put out on your label and how many people will be involved. Penny Ganz, a specialist music lawyer, explains your options. "Before anything else, you need to consider the legal structure of your operation. If it's just you, doing your own music, then you will probably operate as a sole trader. If there are a couple of people working together, then they become a partnership. If you want to ring-fence the operation in some way, you can form a limited company. If a limited company is wound up, the directors will not be liable for any debts, unless they have personally guaranteed them. That is automatic with a limited company.

"Limited companies are appropriate if someone has contributed a sum of money for manufacturing or other costs. In that case, it might be a good idea to give them some shares in the company. So it's a good way to create a vehicle for investment.

"That aside, I would say that in normal circumstances it's not worth forming a limited company, because of the amount of paperwork involved. A government organisation called Companies House is obliged to keep details on all limited companies, and so if you form a limited company, there are lots of Companies House forms that have to be completed at the outset. These can be obtained through a Companies Formation Agent, where you buy a ready-made company and slot in your own shareholders, directors and so on — that usually costs about £100. Once a year, you have to do a return to Companies House with the accounts attached, so they become public. That means you are under scrutiny, but it can work to your advantage, as it allows you to check out other people, too. If as a lawyer, I were signing an artist into a little production company, I would normally do a search at Companies House, and see how long the company had been going, if they'd been making the returns properly, and how much capital they had."

In contrast, a sole trader is personally liable for all amounts owed to creditors and the government. If you go this route, you could find your house repossessed if things go badly wrong. Where two or more people start a business in which neither are considered employees, they become a partnership and are jointly liable.

For any partnership, you will need to sign some sort of joint agreement, and for that you will need to see a music-industry lawyer. A lawyer may seem a little unnecessary when you are starting out, but it really is essential to have one to oversee any agreements you make. If there is more than one of you, you will need the aforementioned partnership agreements to define how the business will be shared. In the case of a DIY label, it is extremely important to establish a 'song-share' agreement to specify the percentage breakdown for words and music each member of the writing team are to receive. Penny explains why this can be a problem. "You might be certain that your working partners are happy with the arrangements, but there are girlfriends, family and friends who may convince them that they should be getting a better deal, and that is unpredictable. An agreement will protect you from those outside influences, so it is essential to put things in writing."

More About Music Lawyers

When you're getting into legal issues, it is essential to hire a fully qualified lawyer, and they should be specialists in the music business. Penny Ganz explains how her legal background is specific to the industry.

"Originally, I did a music degree, but then decided to get into production. It was very difficult for women in studios in those days, so I ended up going the business route. I worked at EMI Records for many years, and I took my legal qualifications while I was there. I then went into private practice for five years, working for the Simpkins Partnership. Then I set up on my own. I've always been involved in music and music law — I am a solicitor, and I have a full Law Society qualification, which meant I had to learn the full legal spectrum.

"I deal with a lot of contractual business, but I don't deal with litigation. I have people around me who I can call on to take those matters on for me. My clients range from a couple of big record companies, to independent companies, to artists, producers and other people involved in the business."

Royalties & Contracts

As far as UK law is concerned, music is a 'musical work', whereas lyrics are 'literary works', but both command the same statutory rights. David Gedge, who made his name in the band The Wedding Present (see the interview in SOS February 2001) and now runs his own Scopitones label, explains how The Wedding Present arranged their affairs. "Everything apart from the publishing was split four ways between the band members. That meant the recording royalties and all the merchandising, but the publishing was shared between the writers in an agreed way.

David Gedge of The Wedding Present and (more recently) Cinerama — another advocate of the DIY approach.David Gedge of The Wedding Present and (more recently) Cinerama — another advocate of the DIY approach.

"We split publishing into thirds between the music, the lyrics and the arrangement. I thought it was quite fair, but subsequently I found out I have probably done myself out of a few quid, because standard practice is half for lyrics and I've always been the sole lyric writer. So, I got my third for lyrics and then there was me and two others writing the music. The fourth person wasn't a writer, but he was involved in the arrangement. Beyond that basic theory, not everybody wrote on every song and there were instrumentals, so it was fairly flexible."

It's important to take the same degree of care over establishing recording royalties whenever you are using other musicians on your recordings. Organisations like PAMRA (the Performing Artists' Media Rights Association) exist to defend the performance rights and subsequent royalty earnings of recording musicians. Even if a friend agrees to help you out by contributing instrumental parts on your record, it could still turn into a legal battle years later if that music becomes successful and that person decides they deserve a share of the royalties. To avoid any confusion, contracts are needed, and once again, these ideally need to be overseen by a lawyer to avoid legal wrangles later.

It's not just musicians who can cause problems in this way — if you use an artist or designer (or both) to produce the look of your release package, you still need to respect their copyright of that material, and an organisation called DACS (Design and Artists Copyright Society) also exists to protect their rights. This principle applies to any photography you use, and therefore an agreement needs to cover the use of logos, artwork and photos for releases and merchandise, and for publishing on your web site. To keep your accounting simple, you will probably want to agree on a one-off fee for all such services, but your artistic collaborators may have other ideas!

Penny Ganz explains the legal situation with regard to musical collaborators: "If the musicians you're using belong to the Musicians Union, then it is very easy to use MU Forms, which are standard one-pager fill-in-the-gaps forms. They contain the wording that you need about the musicians not making any further claim once they have been paid. The idea is to get the musicians in, pay them their fee or whatever you decide, and ensure you then have all the rights to do what you want with the record afterwards. The MU is one source for the document, but most lawyers, studios, and producers will also have standard forms."

Ownership and copyright of finished recordings can also be a cause for dispute. Again, you may need to confirm your agreements in writing. "The owner of the copyright of a sound recording is the person who arranged for the recording to take place, which includes getting people together," explains Penny. "It's a bit of a loose concept, but essentially, if you are recording in your own room or your own studio, and nobody else is involved or paying for it, then it is perfectly clear that the resulting recording will be yours.

"If you have a manager setting up recording dates for you, then probably on balance the manager would be the owner of the copyright of the recording, which is why in that sort of scenario you would want to discuss your expectations with your manager to make sure everyone is in agreement."

In the UK, copyright immediately exists when an original musical or literary work is recorded, whether in writing or otherwise. That could be as a hand-written score or a hissy tape recording. Penny: "It is a myth that you need to do something to register a copyright — it is automatically yours. If you want some proof, you can do the thing where you put a demo in an envelope and post it to yourself and then don't open it. Some people put them in a bank vault, and so on, but that's not really necessary."

Until very recently, it was possible to register any work with a body called Stationers Hall Registry for a fee. Unfortunately, the organisation no longer accepts submissions, although there is now an alternative service provided by the Copyright Protection Agency. The Agency offer something called a First Protection Envelope System which, for a fee of £55, provides you with a uniquely coded envelope for your work. Once sealed and posted, the envelope is stored in a secure vault, while you hang onto a matching warranty form. Comforting though this is, after considering the work involved in making your music and running a label, you may soon decide that this extra task is not worth the trouble or expense.

The Importance Of VAT & Other Taxes

VAT stands for Value Added Tax, and whether or not to become 'VAT registered' is one thing you will have to consider carefully when setting up your business.

Basically, VAT is a tax that businesses charge when they supply their goods and services in the UK or the Isle of Man, and the standard rate for VAT in the UK is 17.5 percent. VAT which is collected from customers and is then paid to Customs and Excise is considered as output tax. Anything charged by your suppliers is explained as input tax. If your input tax exceeds your output tax, you have a surplus, which will be refunded to you every quarter. However, there are certain things that are exempt from VAT, which is one of the reasons you need to think carefully before becoming VAT registered. Toby Marks explains how VAT affects his label.

"If I wasn't VAT registered, then my bookkeeping would be a hell of a lot simpler, but I did it because every time I bought a sampler or did a run of 1000 CDs, I was paying VAT. Obviously, if you are VAT registered, you can claim it back.

"Over the year, I usually end up paying more in VAT than I get back, because every time I sell a CD or get an advance from a UK or EU record label or publisher, I also receive the VAT with it, which I have to hand on to the government. Every time I pay for something with VAT I can reclaim that, and in some quarters of the year I end up getting a refund. If I get a £10,000 advance, which will have £1750 VAT attached to it, in a period where we haven't been manufacturing much or had much to pay for, then I'll end up paying the VAT, but if it's the month where I spend a lot of money on manufacturing, advertising, or buying equipment, then I will probably spend more on VAT, and I will get a refund.

"Having my own studio is one of the biggest reasons to be VAT registered. Buying computers or even small things like guitar strings can soon make it add up. Every time you do a run of CD or vinyl manufacturing you pay VAT, too.

"But there is a plus side to not being VAT registered. At the moment, if I sell a CD on my web site for £10, what I'm actually selling it for is £8.50 plus £1.50 VAT, which I pass on to Customs and Excise — but if I wasn't VAT registered and I sold it for £10, I would get the whole tenner. People don't expect to see stuff £1.50 cheaper because the company isn't VAT registered, so you may as well sell it for the same amount. You may find you're better off paying VAT on your manufacturing and charging more for the retail price."

Legally, you have to become VAT registered if the total value of the taxable supplies you have made in the last 12 months is more than £54,000, or if you expect that the value of your taxable supplies will be more than £54,000 in the next 30 days. However, it is possible for anyone to become VAT registered, regardless of annual turnover (turnover is the amount of money going through the business — not just the profit). You may decide that the added administration created by preparing VAT accounts is worth doing for the tax benefits of being VAT registered, or you may just decide that it makes people take you more seriously as a business.

Unless you are earning less than £72 a week, as a self-employed business owner you will also be expected to pay your own National Insurance contributions and Income Tax. A business may be exempt from paying tax on certain operations, which makes it important to find out a little about the subject. Penny Ganz explains: "If you know what you are doing, you can do all your accounts yourself, and there is no harm in doing that. If you are a sole trader, all of the money you bring in and pay out in terms of business expenses are part of your self-employed business returns, which you make to the Inland Revenue as part of your personal tax return. Some expenses you can claim as business expenses, and others you can't — that's where you need to know what you're doing. For example, if you are a production company, and you buy a load of tapes and blank CDs, and you pay an engineer, those sort of things are business expenses. If you are paid £10,000 for a job and you had to spend £2500 on business expenses, then your profit would be £7500, and you would pay tax on that, rather than on the full £10,000 you were paid. If, on the other hand, as part of that, you did some business entertaining by taking people out to dinner to get the job in the first place, that would not be an expense you could deduct, so you would pay tax on that. The reason I use an accountant is to make sure I'm only claiming for things I'm allowed to, and to make sure I am claiming for everything I can. Partnerships become slightly more complicated, though, because you've got more people involved, and the tax laws are different — even more reason to go to an accountant."

There May Be Trouble Ahead

Of course, it almost goes without saying that any publishing deal or recording contracts you sign will need to be fully checked by a lawyer to protect your rights. As we briefly mentioned earlier, even though you are intending to take the DIY approach to releasing your music, that doesn't mean you won't be using a publisher or that you won't be sub-licensing your records to a larger label to take advantage of their worldwide links. But there are some important issues which you need to consider, not least of which is what happens if one of the companies you have licensed to goes bust (see the 'Small Print, Big Problems' box).

Penny Ganz explains the importance of 'reversion' clauses: "If your lawyer has been doing their job, then your rights should automatically revert to you upon liquidation of the other company. However, sometimes that is more difficult with recording contracts, because they tend to grant rights for ever. If you are under one of those contracts, the rights would go to the liquidator, official receiver or whoever bought the company through the receiver. You could try to buy them back from the receiver, because quite often they don't know the value, but step number one is to check the contract to see whether there is something in there dealing with this issue. Most publishing agreements do not run forever, so they should allow the rights to go back. That is because there is the principle of the rights being licensed to the publishing company rather than being owned by them, so they tend to be more flexible. Recording companies, however, often insist on owning the copyright for ever, because they are putting money into making the recording and, in a lot of ways, are investing a lot more than a publishing company would. The publishing just takes on and administers the rights to something that's already been created."

If you have no contact with a label or publisher, you may go directly to a distributor in order to secure a manufacturing and distribution deal. We will look as some real-life examples of distribution deals later in this series, but it's worth noting that distribution is another very important facet of the business which you should check with a lawyer. "You need to watch out for anything where the distributor is likely to charge a fee for their services. If you, as the releasing label or artist, are not getting income from a record, you can quickly end up with a negative balance. So you need to think about how open to later problems an agreement will leave you. There will be common-sense things, but it varies from contract to contract. The typical things are handling charges, stock movement charges, and charging to return the records to you if you are the label and you've stopped selling records."

Mastering and manufacture of your work is something else we will come back to later when looking at the running of your label, but while we're on the subject of protecting your investments, you may want to be cautious when handing over your precious master or cash deposit to a production plant. "Pressing plants go bust quite frequently." warns Penny, "so if you can possibly avoid paying a deposit up front, then do. Recently, another artist I was representing was in the process of doing a release, but she couldn't find out why her CDs hadn't been delivered — and it was because the plant had gone into liquidation. She had to drive up there very fast and extricate her masters. Thankfully, she hadn't paid the deposit they had first asked her to."

Part 2

These are some of the main issues surrounding setting up your own label which are worth careful thought at the outset. Next month, in Part 2, we'll take a closer look at the murky world of publishing to find out what you can do with a publisher — and how you can do without one. We'll explain more about the MCPS, PRS and PPL, and we'll also be hearing more real-life publishing stories. Until then...

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