Beware of Partnerships

Most musicians transact business on a handshake, and that would be wonderful if there were not heartless people in the world. However, sometimes music can be an ugly business, and even the nicest people can occasionally get irritated with each other. Those handshake transactions could end you up in a lot of trouble with the courts and the Internal Revenue Service. But there’s a simple way to avoid that, and every musician should be aware of it.

Cutout people holding hands in a circle around the Great Seal on a U.S. dollar bill; the eye in the pyramid casts long shadows

People in Circle Around Money

If you form a partnership with someone, that can be done informally. You have a bright idea and you say to your friends, “Hey let’s all get together and ________!” (Fill in the blank.) You have just created a partnership. That has a number of legal and tax implications, even if you never do a single thing with that partnership. If one of the people involved gets annoyed with you, they can report that partnership to the IRS, and then you could be liable for thousands of dollars in fines and penalties, because you have reported your income without following the partnership rules. (Why would your partners do it? Because of the IRS “finders fee” that could net them thousands of dollars.)

How can you protect yourself? Simple. Either have a business owner and one or more employees, or have a standard partnership agreement and a dissolution of partnership drawn up by an attorney, and photocopy and use them for any project with other people. Consult an accountant about the changes in how to file your taxes. If you regularly use these forms, someone who informs on you to the IRS will be much less credible if they cannot produce a signed partnership agreement and you’re less likely to wind up owing a large chunk of money to the IRS.

Find a business attorney and CPA to work with. If you have to barter with them by teaching music to their children, or playing at their children’s weddings to get what you need, so be it. That would be far superior to finding a bill from the IRS for $30,000 in your mailbox one morning.

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