How to Start a Record Label

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Quick Reference

The music industry is full of opportunities, but you don’t have to be a performing artist to hold a career that focuses on your love of music. You can start a record label even if you aren’t an artist yourself, helping to support and guide other artists in their careers. If you are a performing artist, then starting a record label could help you to reach new audiences and take control of your music. In time, you could expand that label to sign on other artists, too. Whether you have dreams of having a big business or want to keep things small, starting a record label could open up exciting avenues in the music industry.

Business Overview

Record labels help to develop, record and distribute music throughout the world. Traditionally speaking, record labels selectively sign artists they wish to represent, focusing on the artists that the label believes to be most promising. Labels earn royalties off of not only the albums that each artist sells but also off of music downloads, radio plays, concerts, merchandise, and more. Most record labels handle everything from licensing to recording to production and marketing.

While major labels dominate the industry, there are also plenty of independent labels. Independent labels can be large corporations, or individual artists may set out to create their own independent labels. While independent labels don’t have access to all of the resources and negotiating power that major labels do, indie labels also operate at lower budgets. They may be able to regain their investments in an artist more quickly as a result.

Industry Summary

According to Statista, the record label industry has gone through flux over the past five years. The emergence of music streaming led to revenue stagnation, but in 2018, the industry revenue grew to $18.9 billion. In 2017, streaming alone accounted for $4.3 billion in revenue, equating to about 38% of the music industry’s entire revenue that year. In 2019, the recorded music industry’s revenue was $7.3 billion.

The record label industry is dominated by three major labels: Warner Music Group, Sony Corporation, and Universal Music Group. Walt Disney Records is the most successful independent music label in America.

Industry Trends

The music industry changes rapidly, and that will continue in 2020 and beyond. Soundcharts predicts that technology will continue to change the way that we consume music. With voice queries, consumers can instantly access playlists of any genre of music they seek. As more and more people stream music from all over the world, streaming trends will also become increasingly linked to the local markets. These new local markets will be rural areas in locations like Africa and Asia, and they stand to further transform music trends.

We’ll also continue to see the decline of the album and the rise of the individual song. The increased value and emphasis on individual songs has led to more productions with remixes and acoustic versions available of a single track. This also spells a change in the music production cycle. Previously, artists would spend years working on an album, which would be expected to satisfy their fans for years until the next album was released. Now, labels have the ability to easily and economically release single songs, allowing artists to put out new music much more regularly.

We’re also seeing an exciting melding of multiple art forms, and the lines that previously existed between music, movies, and fashion are becoming blurred. Musicians are increasingly crossing over into acting, developing their own fashion lines, and even hosting their own shows. Record labels are also embracing this trend, and more labels are financing biopics and documentaries that feature their artists. The music industry faces entertainment competition from other services like Netflix and Hulu, so featuring musicians on these platforms can result in increased music sales and popularity.

 

Related Industries

Record Store

Target Market

A record label’s target market consists of the people who consume the type of music the label produces. These target markets can vary widely and will depend on the label’s specialization, marketing, and niche. A label may target kids, teens, adults, or a combination of audiences.

Skills, experience, and education useful in running a record label

Starting a record label doesn’t require a business degree, but certain skills and experiences are important within this industry.

Detailed understanding of the music industry. An understanding of how the music industry works is essential in running a record label. Ideally, having held an internship or employment at a record label will give a business owner a comprehensive understanding of how labels operate and what can make them a success.

Knowledge of music trends. Record labels face the challenge of identifying artists who will be popular in the coming years. A knowledge of music trends and an eye for musical talent can help a label secure artists who will drive sales and become successful.

Organization skills. Running a record label is a complicated endeavor. A label owner needs to be well-organized and balance multiple projects and priorities, especially as that label grows.

Management experience. Most record labels will need multiple staff, so experience hiring, training, and managing staff will be valuable.

Basic legal understanding. While a lawyer is an essential part of a record label’s team, a business owner who has some basic legal knowledge will be able to understand some of the concepts behind contracts, royalties, and other elements of the industry.

Marketing experience. Even though a label owner may not do the marketing themselves, marketing knowledge and experience will be valuable when assessing potential artists, managing distribution channels, and outlining potential marketing plans.

 

Financial Overview

Startup costs for record labels vary widely. A musician with access to home recording equipment can start their own label out of a spare room for about $1,000. A larger label representing multiple artists and being staffed by multiple employees can cost closer to $50,000 or $100,000 to start.

Common startup costs for a record label include:

  • Home recording equipment or studio rental costs
  • Website development
  • Office equipment like computers and printers
  • Signage

Recording and Production Costs

Recording expenses for labels can be significant. Assuming that a record continuously signs new artists, recording costs will be ongoing. Recording Connection reports that smaller labels may spend $15,000 and up per album on a recording, while larger labels’ recording bills can be $100,000 to $500,000 for a single album.

Once an album is recorded, the label will also need to cover production costs. A smaller label that buys less than 10,000 CDs each year will pay about $1.20 per CD. Labels that buy orders of more than 100,000 usually pay $0.50 to $0.55 per CD.

Steps to Starting a Record Label

Step 1: Write your Business Plan

After coming up with the idea, the next step in starting your business should be to write a record label business plan. Not only will a bank require you to have a business plan, but multiple studies have shown that a business plan helps increase the odds of starting a successful business.

Related:
How to write a business plan
Free sample business plans

Step 2: Form a Business Entity

A business entity (also called a legal entity or business structure) refers to how a business is legally organized to operate. There are four primary business entities to choose from, which include the sole proprietorship, partnership, corporation, and Limited Liability Company (LLC). Each type of entity has its own pros and cons, such as liability exposure, costs, and administrative requirements.

Related: Comparison of Business Entities

Step 3: Name the Business

Finding the perfect label name can be challenging. Not only does the name have to resonate with your customers, but it also has to be available to use.

Be sure to protect your label name and name of songs through trademarks through the U.S. Patent Trademark Office (USPTO).

Related: Tips and ideas for naming a record label

Step 4: Select your Location

While it’s possible to start a small record label out of a home when it’s time to sign on artists, having an established space will add to the label’s trustworthiness, increasing the chances that artists will sign. Rental costs will depend on the size of the space, location, and amenities, like the availability of parking.

Related: Choosing a business location

Step 5: Register for Business Licenses and Permits

While there aren’t licenses specific to record labels, a record label owner will need to obtain certain business licenses and permits. These permits and licenses can vary based on the state and town where the label is located. Some of the general local, state, and federal registrations most businesses need include a sales tax permit, Employer Identification Number, and Occupancy Permit.

Related: Common business licenses, permits, and registrations by state

Step 6: Research Distributors

While an independent label can find success managing their own digital distribution through platforms like Spotify and Soundcloud, that’s often not their area of expertise and may hamper getting the music out. A distributor will work with the label for manufacturing CDs/vinyl, getting the music to stores, listing online with digital platforms, and promoting to radio stations to get on their playlists.

Step 7: Find Financing

Coming up with a good business idea and having the skills to run it are one thing, but getting the funding to start a record label is another as a lot of the start-up costs go towards expenses that aren’t backed by assets, which banks favor when making a loan. To get a loan, the borrower(s) will need to have good credit and personally invest at least 25% towards the total start-up costs.

Related: Finding the money to start a business

Step 8: Open a Business Bank Account

Keeping your business and personal finances in separate business bank and credit card accounts makes it easier to track the business’s income and expenses.

Step 9: Get your Marketing Plan in Place

Record labels need to market themselves to attract the quality artists that they hope to represent. Common marketing activities include social media marketing on Facebook, Instagram, and Twitter, internet advertising, and even networking at industry events. Marketing costs will depend on the type and volume of activity performed.

Related: Low-cost ideas to market a new business

Step 10: Get Business Insurance

A record label needs several types of insurance for full coverage:

  • General liability insurance protects the record label if artists or customers are ever hurt on the business’ property or from the business’ work. This type of policy helps to cover expenses like legal fees or medical bills.
  • Professional liability insurance would help to protect a record label against work-related errors, like copyright infringement. This policy can cover legal fees and damages.
  • Commercial property insurance helps cover expenses like losing a business’s equipment or building in an event like a fire.
  • Worker’s compensation insurance protects the business in case any employees are ever injured while on the job.

The costs of insurance policies will vary depending on factors like the value of a business’ equipment and building and the number of employees on staff. To get the best idea of what to budget for insurance, request quotes from multiple companies. When you compare the quotes, look not only at the differences in premiums but also at how coverage limits, exclusions, and deductibles compare.

Related: Types of insurance your business may need

Step 11: Hire Employees

A label owner may be able to manage the label as it grows, but eventually, it will be time to hire staff. ZipRecruiter reports that independent record label salaries average $52,230 per year, though salaries can range from $19,500 to $102,000.

Record labels often hire a variety of professionals throughout the year, but those professionals are often hired on a freelance basis. Graphic designers, album producers, sound engineers, and marketers all play a role in the launch of an album, but hiring them on an as-needed basis can help labels keep employment costs down.

Related: Hiring your first employee

Step 12: Set up an Accounting System

Setting up an accounting system is critical to the long-term success of your business.

Staying on top of taxes not only keeps the business out of trouble with the government, but the numbers can be used to track and monitor trends and cash flow in the business and maximize profits.

Related: Setting up accounting for your business

 

How much can you potentially make owning a record label?

Record label income varies vastly, and signing on a hit artist can greatly boost a label’s profits while also encouraging additional talented artists to sign with the label. A report from Music Business Worldwide revealed that in 2019, Universal, Sony, and Warner made a combined average of $19 million per day from streaming services alone.

But those profits aren’t typical, and independent labels tend to make much less. DJ Mag reports that no labels make profits during their first few years in operation, but as they develop a body of work, record labels start to enjoy multiple revenue streams, which can lead to increased profits. If a label owner has an eye for great talent, understands how to curate that talent to appeal to its audience, and has a bit of luck, the label can be profitable.

 

Things to consider before starting a record label

The record label industry is saturated, and many musicians start their own labels as a labor of love. If you’re considering starting your own label, having internship or work experience in this industry is highly valuable. It can also prepare you for some of the challenges that you’ll face. Be prepared to spend years developing your label and focus on what value you can give to the artists who sign with you. By studying the competition, you may be able to find something that other labels aren’t doing. If you do things a little differently, you may have a profitable business venture on your hands.

 

Resources:
American Association of Independent Music
Music Business Association
Recording Industry Association of America