Like the answer the many legal questions, the answer to this question is: it depends.

Picture a four piece band composed of a guitarist, vocalist, bassist, and drummer. Let’s imagine a couple of different scenarios.

In the first scenario, the band members have formed a business entity, such as a limited liability company (LLC), a corporation, or another form of legally-recognized partnership. Within the business entity, each of the four musicians would be either a member of the LLC, a shareholder of the corporation, or a partner in the partnership. A formally organized business entity would apportion ownership shares in the business to each musician, either on an equal basis or on an unequal basis. Such a business entity would be considered a legal “person”, capable of entering into a binding contract.

In the second scenario, imagine that the vocalist is the star, the central driving force of the group. The vocalist, as a person, could sign a contract with a venue and then could sign separate agreements with each of the other band members, in effect hiring them to work for her. She could then pay the other band members a share of the revenue she receives from her contract with the venue.

In a third scenario, each of the individual musicians could sign a contract with a venue (or they could sign one big multi-party contract). The agreement would specify the amount of compensation due to each individual band member, as well as the rights and obligations of each individual band member.

There are benefits and pitfalls to each scenario outlined above. For example, organizing a formal business entity is a good way to give each musician a contractual stake in the “band” and permit the “band” to be a separate entity from each musician. On the other hand, formal business entities often carry tax implications, and selecting the right entity is important. As another example, a vocalist who signs a contract with a venue and then hires the other musicians herself may save some money by not organizing into a formal business entity, but if something goes wrong or there is a dispute with the venue, the vocalist may be the one who bears all of the burden of resolving the matter.

Deciding how to organize a creative enterprise is just as important to a band’s success as its creative output. The organization dictates each musician’s responsibilities to the band, how individual band members are compensated, and what sorts of limitations on liability are available for each of the individual musicians.

Maximizing financial gain and minimizing legal risk are trade-offs; the trick is finding the right balance for your band.