Entertainment businesses operate like many other business enterprises: ultimately, the business must make a profit in order to survive. One way to help sustain and protect an entertainment business is to document the business relationships through written entertainment contracts between parties that participate in the providing of services to clients.
For example, if several people are business owners, having a written agreement between those owners is an essential ingredient to the business’ success. Such an agreement will vary based on the business entity, but generally, the agreement should describe each owner’s ownership interest, how management decisions are made, how owners join and depart from the organization, and how the business finances will be managed.
The forms of these agreements will vary based on the kind of business. If the entity is unincorporated and there are two or more owners (“partners”) who share in the profit or loss of the business, the entity is likely a general partnership and would be governed by a partnership agreement (and, in its absence, state law for partnerships). If the entity is an incorporated limited liability company, the owners (“members”) would typically enter into a membership agreement. If the entity is a corporation, the owners (“shareholders”) would enter into a shareholders agreement. The absence of such written agreements can make things much more expensive later should disputes arise among the owners.
For entertainment businesses that act as a booking agent for performers, having a written agency agreement with the performer is an important document. This contract would clarify the procedures for scheduling and booking performances, might determine whether the agent is exclusive for the performer, what geographic area the agent would book the performers within, how the agent is compensated, among other considerations.
Also important to an entertainment business are the individual performers that work for the entertainment business. Whether or not these performers are employees or independent contractors is an important distinction with substantial legal and tax implications for the business. Employers understand that an independent contractor can potentially be less expensive than a full time employee because employers can avoid paying certain payroll taxes for independent contractors (shifting the tax burden to the contractor). However, if the business mistakenly determines a staff member to be an independent contractor, the business may quickly face some very costly back taxes and penalties.
Independent Contractor vs. Employee
Determining whether a performer is an independent contractor or employee is highly fact specific. There are a series of factors that are used to determine this distinction; these factors may vary by state and by the regulating entity. However, at its roots, an employee is a person over whom the employer controls both the results of the work performed, and the methods and tools to achieve the result. According to IRS Publication 1779, the IRS looks at three basic areas to determine if a staff person is an employee or independent contractor: (a) behavioral control, (b) financial control, and (c) the relationship of the parties.
Generally, the more control the business exercises over how the job is done (not just what results are expected), the more the staff person is likely to be viewed as an employee. With regards to financial control, if the staff person can incur a profit or loss from his/her activities, you have a significant investment in the work that you do, and/or you pay your own business expenses, you are more likely to be viewed as an independent contractor. And on the relationship of the parties, if the business pays benefits for you (like health insurance, pensions, and paid time off), and there is no written agreement between the parties, the IRS is more likely to view you as an employee. Independent contractors typically are able to work for several businesses providing similar services within their field.
In Maryland, the Department of Labor and Licensing also considers whether the business retains the right to discharge the staff member, and whether the business provides the tools, materials and the place to work for the staff member. Typically, the independent contractor would have his/her own tools and materials, and would work from his/her own office or location. DLLR also indicates that independent contractors are usually in a business that is different from the hiring business; professionals like lawyers, dentists, and public accountants are commonly independent contractors in business for themselves.
There may be other factors to consider besides the ones noted above. In the entertainment business, musicians are may be independent contractors because they (a) have their own tools (e.g., instruments), (b) they may work for more than one business or band, (c) they typically have a fair amount of time and money invested in their education and equipment to be musicians, (d) the business they work for tends to exercise control over the result (the performance), rather than the specific methods of how the work is performed, and (e) typically organizations that schedule or coordinate performances are in a different business from the performers. In some cases, performers take a percentage of ticket sales, and won’t get paid if either no one shows up for the event or if the event is canceled. In those cases, a performer is more likely to be viewed as an independent contractor.
However, there are also factors that might tend to make a performer an employee: (a) benefits for the performer like paid sick or vacation time or health insurance, (b) the exercise of control by the busiess over practice times and location and how a particular musical piece is performed, and (c) the lack of a written agreement between the parties, suggesting that the business may terminate the relationship at will with the performer, without further obligation.
If you aren’t sure if the performer is an independent contractor or employee, you can request that the IRS provide a private letter ruling through filing Form SS-8. An attorney in your state may also be able to advise you on the state-specific factors and your circumstances.
There may be other relationships for an entertainment business (such as licensing and royalty agreements for the licensing of copyrighted works, contracts with merchandise distributors, record label and publisher agreements, venue agreements, just to mention a few). The more that can be documented, the more likely it is that you will get paid and the less likely it is that parties will have disputes.
Documenting relationships in the form of formal, written agreements at the beginning of the relationship can help save headaches and costly mistakes down the road. Consulting with an experienced attorney can help you to craft effective and binding agreements.
 In close cases, the written agreement may determine that the staff person is an independent contractor.