Internal Group Deals

This Article Originally Published May 2000

by Donald Passman

When two plumbers from Pacoima decide to go into business together, they know enough to have a lawyer write them a partnership agreement, or at least they know enough to go to the supermarket and buy a printed form. For this reason, it always astonishes me that groups earning tens of millions of dollars sometimes never get around to formalizing their relationship. And, every once in a while, this neglect bites them on the rear end.

The time to make an agreement among yourselves is now, when everybody is all friendly and kissy-face. When you're fighting with each other, especially if there's a lot of money on the table, you may find yourself killing the goose that lays the golden eggs as well as supporting the Scholarship Fund for Entertainment Lawyers.

One of my early experiences as a music lawyer was trying to solve the problems of a major group who had never formalized their relationship. One of the members got pumped up by a relative who told him that he was the real star of the group--even though he didn't sing or write. So he started a fight to stop the others from using the group name, and both sides got so angry that they couldn't agree on anything. Because they were set up as a corporation, and were deadlocked on every conceivable issue, we had to have the court appoint a neutral third director to break the ice. The upshot was that the litigation lasted over nine years, and cost the parties over $1 million in legal fees. And all of this could easily have been avoided with a simple agreement and a couple of hours of planning.

Corporation vs. Partnership

The major differences between having a partnership or corporation are the tax planning aspects, the liability limitations and the fact that the corporations are more expensive to set up and run; otherwise, it doesn't make much difference whether you're a corporation or partnership. By liability limitations, I mean that corporations limit what assets someone suing you can grab. In a corporation, they can only get the assets of the corporation. With a partnership, however, they can grab both the partnership's assets and the personal assets of every partner.

The only mechanical difference between the two kinds of entities is that,if you want a partnership, you need a written partnership agreement and if you want a corporation, you need both a written shareholders' agreement and employment agreements between yourselves and the corporation. For the purpose of this discussion, I'm going to use partnerships because they're simpler. But all these principles can be built into a corporate structure.

The Most Important Asset

Can you guess what your most important asset is? Apart from your good looks, charm and talent, your most important asset is the group name. So, what ever else you do, by all means, figure out what to do with your group name if there's a fight. You need to think through everything about the group name, such as what happens to it if:

• The lead singer and songwriter leave the group.
• The drummer, who doesn't write or sing, leaves the group.
• Three out of five members leave to form another group.
• The group breaks up entirely and everyone goes back to Waxahachie.

Obviously, there are about ten thousand other possibilities, but all of them can be covered with a few general rules. The means of dealing with the name can be anything you want it to be, but the most common solutions run along these lines:

1. No one can use the name if the group breaks up, regardless of how many of you are still performing together.
2. Any majority of the group members performing together can use the name. For example, if there are seven people in a group that breaks up, any four of them together can use the name.
3. Only the lead singer, Sylvia, can use the name, regardless of who she is performing with.
4. Only George, the songwriter who founded the group and thought of the name, can use the name, regardless of who he is performing with.
5. George and Sylvia can use the name as long as they perform together, but if they don't, no one can use the name.

Donald Passman is a Los Angeles-based music attorney with the firm of Gang, Tyre, Ramer & Brown. Specializing in music business law for over 20 years, his clients include major publishers, record companies, film companies, managers, producers, songwriters, and artists such as REM, Janet Jackson, Quincy Jones, Tina Turner and Green Day. On a regular basis, we will be excerpting from Mr. Passman's best-selling book, "All You Need To Know About The Music Business."

From "All You Need To Know About The Music Business" by Donald S. Passman. ©1991, 1994, 1997 by Donald S. Passman. Reprinted by permission of Simon & Schuster, Inc.