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. While this can be an exciting industry to enter, it also requires hard work, dedication, business savvy, and, of course, great music!
Whether you’re an artist looking to self-release or an entrepreneur with a passion for music, check out our guide to starting a record label and the key steps involved.
At its core, a record label is a business that discovers artists, records their music, and then sells that music to the public. You’re the bridge between the artist and the audience. 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.
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Record Label Industry
The music industry has undergone significant changes over the past few years, mostly due to the rise of digital platforms. Gone are the days when major labels held all the cards. Independent labels now have more tools than ever to get their music heard. Platforms like Spotify, Apple Music, and YouTube have leveled the playing field, making it easier for smaller labels to distribute music and build an audience.
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. In 2022, independent labels are projected to generate $356 million in revenue in 2023, which is down by 2.1% annually over the previous five years.
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 an 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.
Steps 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: Research the Market
Starting a new record label can be an exciting opportunity. However, it’s not just about having a passion and love for music. You also need to consider the demand for your music label to ensure that you can operate sustainably.
Starting a record label without first understanding the demand is like driving with your eyes closed. You might get lucky and reach your destination, but the risk of crashing is high. Market research can tell you whether there’s room in the market for your kind of label and what specific niches might be underserved. Are people hungry for more indie rock labels? Is there a gap in the market for labels focusing on local artists? These are the types of questions you’ll want to answer.
A few considerations when researching the market:
Identify and analyze your competitors: The first step to researching demand when starting a new record label involves identifying and analyzing your competitors. This action helps you understand what’s popular in the market and identify the gaps that you can fill. Check out what other record labels are doing, the artists they’re promoting, and the type of music they’re offering. Analyze their weaknesses and strengths, and consider how you can differentiate your music label from the others.
Choosing a niche and understanding your customers: Choosing a niche is vital for standing out. You can’t be everything to everyone. Instead, focus on a specific genre, target audience, or geographic location. This makes it easier to market your label and build a loyal fan base. A niche also helps when you’re negotiating with distributors or pitching your artists to radio stations and blogs. You’re the go-to label for “X,” and that can be a powerful selling point.
Find out what your target audience likes listening to, their music preferences, their buying habits, and the amount they spend on music each year.
Determine the size of your market: Understanding the size of your market is another necessity when researching the demand for your new record label. Identify the number of potential customers in your target market and their locations. This information will help you develop strategies to reach your target audience more effectively.
Develop a Unique Selling Point (USP): With the above information, you can begin carving out your unique selling point (USP), which describes your record label’s unique features, differentiating you from the competition. Develop a clear USP that draws music lovers to your label. For example, if you specialize in discovering new artists, emphasize this aspect of your record label in your marketing materials. Your USP will create an identity for your record label that sets you apart and attracts customers sustainably.
Step 2: Write a Business Plan
Writing a business plan is an integral part of starting a record label. A business plan serves a couple of purposes. One, it is like your road map and helps you stay focused, showing you where you want to go and how to get there. Two, lenders and investors typically want to see one before they will consider funding a project.
While all of the sections are important, there are a few that I would recommend spending some more time on, especially when seeking funding.
This is where you show there’s room for your record label. Talk about who will listen to the music you produce. What’s the demand like for this type of music? Why will your label stand out among the rest? Banks and investors want to know that people will buy what you’re selling, so make it clear why you believe your business will succeed.
Who’s going to run the show? Funding sources care a lot about the people behind the business, and a good team can make or break a company. List the owners and any key employees, what they will do, and their experience. This shows the bank you have the right people to make the business work.
Of particular interest to lenders and investors, the financial projections show the potential profitability of your business. They want to see how well you’ve thought about costs, earnings, and profits. Be ready to explain how you came up with these numbers. If you don’t understand them, the bank or investor won’t have much confidence in your ability to run a business.
Before you go to the bank, let someone you trust look at your plan. Maybe it’s a friend who runs their own business or an accountant. They can spot things you might have missed and give you advice on improving your plan. Better to catch any issues now than when you’re in front of a lender.
Related: How to write a business plan
Step 3: Secure Funding
So you’ve done your homework. You know there’s demand for your record label, and you’ve got a solid business plan. What’s next? Making sure you’ve got the money to make it all happen. Why? Because no matter how great your idea is, it won’t go far without funding.
Let’s talk about where that money can come from.
Personal savings: This is often the starting point. If your own savings can cover the costs, you’re good to go. You don’t need to have a lot of money to start a record label. You can start small and invest your profits back into the business, but some folks need a bit more to get things off the ground.
Traditional lenders: If you need more than what’s in your savings account, banks are usually the next step. To get a bank loan, you’ll need to put up at least 15% of your own money towards the total cost of the project. A good credit score and collateral like a house or car also help. If a bank feels the loan is a bit risky, they might go for an SBA (Small Business Administration) loan guarantee to feel more secure about lending to you.
Friends and family: Getting a loan from people you know is also an option. But let me tell you, money can complicate relationships. So, if you go this route, make sure everything’s written down. Everyone should know what to expect when it comes to payback time.
Investors: Investors are aware of the growth potential of the music industry and are looking for investment opportunities in this sector. This is evident in the increasing amount of venture capital funding that is flowing into the music industry.
Crowdfunding: If you already have an artist lined up, crowdfunding can help you to build a loyal fan base and to generate excitement for your label.
Step 4: Register the Business
The next step is to make your record label legal and official. This involves a few key steps: choosing a business structure, registering your name, and getting the right licenses. Here’s how to go about it.
Business structure: The first step in registering your business is deciding on a structure. This is important as it determines your liability, taxation, and administrative requirements. Here are the four common types of business structures:
- Sole proprietorship: This is the easiest and cheapest way to start. You’re the boss, and you call all the shots. But, if the business runs into trouble, your personal assets, like your home and savings, are at risk.
- General partnership: Two or more people share ownership. Like a sole proprietorship, it’s pretty easy to start but does put personal assets at risk.
- Corporation: More complicated and expensive to set up, but your personal assets are protected. Corporations also have the benefit of being able to sell stock to raise funds.
- Limited Liability Company (LLC): This gives you some of the legal protections of a corporation but is easier to set up and run.
Related: Comparison of business structures
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:
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Business name registration: After registering the business structure, you may need to register your business name. This process will vary depending on what business structure you pick. Sole proprietors and partnerships will often be required to register a “Doing Business As” (DBA), while corporations and LLCs register with the state during the formation process.
During this time, it’s also a good idea to check if the name you want is available as a web domain, even if you’re not ready to set up a website yet.
Obtain business licenses and permits: While there aren’t licenses specific to record labels, a record label owner will need to obtain some general business licenses and permits. These permits and licenses will vary based on the state and town where the label is located. Some of these could include a local business license, sales tax permit, Employer Identification Number, and Occupancy Permit.
Step 5: Purchase Equipment & Set Up the Studio
The moment has come to make your independent record label a reality by choosing and setting up your location. It’s where the planning stops and the action begins.
The first step in setting up your recording studio is to find the appropriate space. Many musicians struggle with finding a suitable location. One potential strategy is to rent a former studio, as these spaces are already designed for recording purposes. Another strategy is to start the recording studio in your home or garage. This can significantly reduce costs, but you’ll need to ensure the space meets your needs and provides a professional environment for your artists.
After getting the studio space locked down, the next step is to get the equipment. This could include soundboards, microphones, and even specialized software. Remember, your equipment should be high-quality; you want the best sound recordings possible. But balance quality with your budget, as equipment can quickly become expensive.
Step 6: Research Distribution Channels
Distribution is the bridge that connects your artists’ music to the ears of listeners. Without the right distribution channels, even the best music can get lost in the shuffle.
The first order of business is to get familiar with the kinds of distribution channels that are available. These can range from traditional methods like CDs and vinyl to digital platforms like Spotify, Apple Music, and YouTube. Each channel has its benefits and drawbacks, so it’s key to match them with your target audience.
Once you have a grasp of what’s available, do some digging to find out where your target listeners hang out. If your target audience prefers vinyl records, then physical distribution will be an important part of your strategy. However, digital distribution will be key if your audience primarily listens to music online.
Once you’ve identified potential distributors, evaluate them based on their terms, reputation, promotional support, and reporting capabilities. You want a distributor who not only gets your music to the right places in a cost-effective manner, but also supports your label’s growth and success.
Step 7: Create a Marketing Strategy
Competition in the music industry is tough, and there are a lot of people who are trying to do the same thing you are. Even with the best artist, you need a good marketing strategy.
One of the key strategies is social media promotion. Platforms like Facebook, Instagram, and Twitter can help you reach a wide audience, engage with fans, and promote new releases. Regularly posting engaging content, teasers, behind-the-scenes footage, and artist interviews can increase visibility and build anticipation for upcoming music.
Another effective strategy is pitching your artists’ music to popular blogs, playlists, and radio stations. These channels can help amplify your reach and introduce your music to new audiences.
Also, don’t underestimate the power of live events. Record labels use live events as part of their marketing strategy. Hosting album release parties, concerts, or music festivals can generate buzz around your artists and provide a unique experience for fans.
Step 8: Prepare to Launch!
You’re almost there, and the excitement is building. But before you officially open your record label company, there are a few last-minute things to take care of to ensure a smooth launch and ongoing operations. These will vary by individual, but here are some common tasks to consider:
Business insurance: Protect yourself from unexpected setbacks with the right insurance. Coverages can range from property and equipment insurance to liability coverage.
Setting up bookkeeping: Accurate financial records are essential. Whether you use software like Wave Accounting (FREE) or Quickbooks or hire a dedicated bookkeeper, make sure you’re set up to track income, expenses, and taxes.
Contracts: Agreements need to be legally sound. For record labels, you’ll often deal with artist contracts, distribution agreements, and licensing agreements. RocketLawyer and Law Depot have free and inexpensive templates that may be helpful.
Opening a bank account: Keep personal and business finances separate. Open a business bank account strictly for business transactions.
Royalty payments: Setting up a royalty payment process is a must in the music industry. This ensures that artists are paid their due for the use of their music. This could involve direct payments or using a royalty distribution platform like Songtrust or TuneCore.
Onboarding artists: You can’t have a record label without artists. Seek talent that fits your label’s niche and vision.
Intellectual property protection: It’s important to protect the name of the record label and songs from unauthorized use. This includes:
- Trademarking the label name: A trademark is a word, phrase, symbol, or design that identifies and distinguishes the source of the goods of one party from those of others. Trademarking a record label’s name can help prevent others from using the same or a similar name.
- Copyrighting songs: Copyright protects original works of authorship, including musical compositions. Copyrighting a record label’s songs can help prevent others from copying, distributing, or performing the songs without permission.
Related: Trademark vs. copyright
Join industry associations: Consider joining associations like the Recording Industry Association of America (RIAA), the American Association of Independent Music (A2IM), or the National Academy of Recording Arts & Sciences. These can provide you with resources, education, and a valuable network.
Common Questions When Starting A Record Label
How much does it cost to start a record label?
Starting a record label can vary widely in cost, but a basic setup might run you anywhere from $10,000 to $50,000. This range includes several important categories of spending, so let’s break it down:
Location: Depending on where you decide to set up shop, a commercial space could cost you several thousand dollars upfront. Deposits often require the first month’s rent plus an additional month as security. In a city, a decent space might cost $2,000 a month or more, leading to an initial deposit of around $4,000.
Legal and business setup: Registering your business and obtaining the necessary licenses could run up to $1,000. This includes costs like forming your business structure, be it a sole proprietorship, partnership, or LLC, and any state or local licenses you need to operate.
Equipment: Quality recording equipment is crucial. A basic home studio setup could start at around $5,000, but for a professional studio, you might be looking at $15,000 to $30,000, depending on the gear you choose.
Marketing: Getting the word out initially might cost around $2,000 to $3,000. This could include the costs of setting up a website, online advertising, and creating promotional materials.
Miscellaneous: Always account for unexpected expenses. You might need specialized software, or you might decide to splurge on some high-quality chairs for your studio. Budget at least an additional $2,000 for these miscellaneous costs.
How profitable is a record label?
The profit record labels can earn varies widely based on their size, music genres, artist roster, and revenue streams. On average, industry research shows independent labels operate on profit margins of around 5-10%. This means for every $100 in revenue, $5 to $10 is profit.
Let’s look at an example label generating $500,000 in annual revenue. They sign 3 new artists who each sell 5,000 albums at $10 per CD, plus additional merchandise and streaming royalties.
– Physical album sales: 3 artists x 5,000 albums x $10 = $150,000
– Merchandise sales: 3 artists x $5,000 each = $15,000
– Streaming royalties: 3 artists x $50,000 each = $150,000
– Live performances: 3 artists x $25,000 each = $75,000
– Licensing/other revenue: $110,000 Total Revenue: $500,000
Expenses including production, marketing, overhead, salaries, etc. typically run 90-95% of revenue, so approximately $450,000.
With $500,000 in revenue and $450,000 in expenses, this label would earn around $50,000 in pre-tax profit, representing a 10% profit margin.
What skills are helpful 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.
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?