Ever since I was a teenager, my dad would occasionally send me things to sign. Things for the family business, where I was part owner. I didn't understand the complexities of it, and didn't need to, so I'd just sign without question.
In 1994, as I was recording my first album, I needed to borrow $20,000 to buy studio equipment. He said, “Instead of lending you money, start a corporation. Then the family business can buy shares in your corporation.”
My dad's company bought some shares, and that helped me finish my album, and continued to run my record studio at a profit.
Four years later, I was living in Woodstock New York, and started this little hobby called CD Baby.
The first time I got a check addressed to “CD Baby”, I brought it down to the bank and told the bank teller, “I need to set this up as a new business, so let's open a new business account.”
She said, “Oh you don't need to do that. You can just make it a DBA on your Hit Media account.” (At that time, Hit Media was a recording studio and booking agency.)
Seemed a little strange since CD Baby was definitely a new business, but it saved 10 minutes and $100, so I said OK.
Four years later, CD Baby is doing really well. A few million dollars in sales. Probably half a million dollars in net profits. I paid my dad back the $20,000 I borrowed.
I call up my accountant in January to say, “OK. I got all the Quicken books balanced. Should we file early this year?”
He said, “Oh, you don't need to file. CD Baby is just a lineitem on your dad's company's tax return.”
I said, “Uh... what?”
“You didn't know that your dad's company owns 90% of CD Baby?”
“You should talk to your dad.”
Yes, it turns out that one of those pieces of paper I signed without question had sold 90% of the shares of Hit Media Inc to his company.
That would have been fine, except the bank teller advised me to make CD Baby a DBA of Hit Media, so now that meant my dad's company owned 90% of CD Baby.
FFFFffff.... SSSSssss.... RRRRrrrr.... Oh, what a sinking feeling.
I couldn't be mad at my dad. He was doing me a favor in 1994, and thought I knew the deal. Nobody thought my little hobby was going to turn into a multi-million-dollar company.
It was my fault for not reading what I signed. My fault for letting a bank teller's quick advice make that major decision for my business structure.
What made it even worse is that I couldn't just buy it back for the original $20,000. The IRS won't allow that. The only way was to pay full market value, as determined by an outside valuation company.
In the end, I had to pay $3.3 million dollars to buy back that 90%.
- Really understand something before you sign it.
- Ask all questions, dumb questions, hypothetical questions, extreme-scenario questions, “what if” questions, until you're sure you really fully understand it as well as anyone on earth.
- It's also very worth paying for an hour meeting with your accountant, and asking 100 questions there, too.
- Each separate business venture should usually have its own LLC. It's very cheap through companies like LegalZoom, and well worth it.
- This was definitely all my fault. No one else to blame.
- ... plus whatever other lessons you're going to teach me in the comments, below. :-)