How to Start a Record Label

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How to Start a Record Label

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 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.

The record label industry is saturated, and many independent artists 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.

Related Industries

Radio Station
Record Store

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 music distribution channels, and outlining potential marketing plans.

Checklist for Starting a Record Label

Starting a record label can be an incredibly rewarding experience, but it’s important to make sure you’re prepared for the challenges ahead. Use this checklist to help get your business off on the right note.

Step 1: Write a 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

Step 2: Choose a Business Entity

A business entity (also referred to as a business structure) refers to how a business is legally organized to operate. There are four primary business structures 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.

When deciding on which business entity is best for a record label, it normally comes down to the sole proprietorship and Limited Liability Company.

A partnership opens the owners up to unnecessary personal liability because if a partner does something to get the business sued, or runs off with cash from the business, the other partners are personally liable to repay.
 
The corporation can be a good choice to minimize liability risk because it separates the business assets from the owner’s assets. If the corporation is sued or certain business debts can’t be paid back, the owners aren’t personally responsible to repay them. The downside to the corporation is that it is more complicated than all the other entities and requires more administration than the LLC. If you plan on raising a lot of investment though, the corporation is usually the better choice.

That leaves the sole proprietorship and LLC.

The sole proprietorship is the least expensive and easiest entity to start which is appealing. The downside is the owner is personally liable should anything happen to the business, which is an important consideration. The LLC offers the ability to operate as a sole proprietorship with the liability protection of a corporation. Depending on the state, the cost to form an LLC runs from $40 – $500, which is pretty inexpensive for protecting the owners from business-related lawsuits and certain debts.

Related: Guide to forming your LLC
 

Forming an LLC sounds complicated and expensive, but using an entity formation service guides you through the process so you know it was done right.


Some popular LLC formation services include:


IncFile - $0 plus state fees & free registered agent for 1 year!

IncAuthority - $0 plus state fees & free registered agent the first year!

ZenBusiness - $49 plus state fees & free registered agent for 1 year!

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 the name of songs by trademarking 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 business registrations your business may need are a business license, 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 small business and personal finances in separate bank accounts is important to track the income and expenses of your business and identify trends.
 
Many banks offer free business checking accounts, so be sure to find a cost-effective option for your business.

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.

Related: Low-cost ideas to market a new business

One important task while working on the marketing is developing an online presence. A website developer may be out of the budget, but Wix makes it easy for non-technical people to get a website running quickly and affordably.

Step 10: Get Business Insurance

There are several types of insurance to consider when starting a record label. A few of these include:
– 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.
– Worker’s compensation insurance protects the business in case any employees are ever injured while on the job.

The cost to insure a record label 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 the accounting for your business

The thought of accounting can be intimidating for a lot of new entrepreneurs. There are a number of ways of handling bookkeeping, from DIY to hiring a bookkeeper. These include:

- Pen and paper - Low expense, but difficult to track.
- Spreadsheet - Low expense, but easy to make errors.
- Accounting software - Medium expense, but owner typically inputs expenses. Some great accounting software programs include Freshbooks or Wave Accounting.
- Hire a bookkeeper - Higher expense, though very affordable at $100-$200 per month in most cases. A dedicated bookkeeper will probably save money because, in addition to handling all of the bookkeeping (so you can focus on the business), they also provide personalized tax advice and ensure the business is in compliance.

Find bookkeepers in your local area or use a service like 800Accountant.

How much does it cost to start a record label?

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.

Some common startup costs for a record label include:
– Home recording equipment or studio rental costs
– Website development
– Office equipment like computers and printers
– Signage

How much can a record label owner make?

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 platforms 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.

Are there grants to start a record label?

It’s extremely rare to find a grant to start a record label. If you search for business grants, you will come across a lot of scams and misinformation. Occasionally an organization will offer grants to start a business, however, be skeptical and don’t provide any sensitive personal information or pay money to get more information.

Legitimate federal grants can be found at Grants.gov, and you can check on your state’s economic development office to see if they have any grants available.

What is the NAICS code for a record label?

The NAICS code for a record label is 512250.

The NAICS code (North American Industry Classification System) is a federal system to classify different types of businesses for the collection and reporting of statistical data.

Related: What is a NAICS code?

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

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