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How to Start a Record Label with No Money

Learn how to start a record label with no budget and make money in the music industry

Love music but can’t play a note to save your life? Maybe you want to make millions but get stage fright speaking to more than two people at once.

There’s still an opportunity for you in the music industry but it’s behind the scenes as the record label behind the band.

In the old days, and by ‘old days’ I mean 1990…it was the major recording labels that ruled. Giants like Universal, Sony Music and Warner were an artist’s only shot at getting on the radio.

The internet revolution and all the new tech has given birth to thousands of smaller indie record labels…and some of them actually make money!

I’m not going to lie to you and tell you that starting an independent record label is easy or guarantee you’ll make money. It’s a competitive industry and you definitely need to know what you’re doing. Put in the work though and while you may never make the $19 million a day the majors make, you can reach that seven-figure payday.

Let’s start by looking at how record labels make money and then how to set up your own label.

How Do Independent Record Labels Make Money?

Record labels make money off their product, the artist and recordings in this case. Of course, the money is in the details and how many ways you can figure out how to make money off those recordings.

A few common, and not so common ways to make money as a record label:

  • Record sales – selling albums and singles through traditional stores and online
  • Licensing and publishing – selling the right to a song or clip to be used on radio, in a video or movie
  • Touring – this is more than just concerts and includes anywhere you can book your act to perform like festivals and fairs.
  • Merchandising – anything you can slap the band’s label on and sell including t-shirts, stickers, housewares…anything!
  • Streaming rights – collecting a royalty anytime someone downloads the song
  • YouTube – one of the newest and most often neglected revenue streams…and one of the best!

Before you see all these ways to make money and get dollar signs in your eyes, understand that the record label business model is very much like the venture capital world where I’m from.

We have a saying in the VC world, you have to “lose small to win big.” That means if you invest in 100 new companies; 50 will probably make no money at all, you might get your money back on 30 and make a little money on another 10 investments. It’s the 10 remaining companies, the ones that really take off that make up for all the work and risk. It’s those few success stories that make you rich!

It’s the same way in the recording label business. You’ll have to invest time and money in a lot of bands and will probably lose money on most. It’s those few big acts that come around that will make you millions though.

If you don’t have the money to invest in all those bands, waiting for your big break to come around, you’re going to need to know how to squeeze every penny out of even the ones that don’t blow up.

What Percentage do Record Labels Make?

Even with the bands that go platinum, you won’t be keeping all the money. Besides all the costs to produce and promote a band, you’ll also have to split the profits with the artists.

When a record label signs a group and contracts for an album, they usually give the group an advance that can be anywhere from a few thousand to hundreds of thousands of dollars. When the album starts selling, the label takes 100% of the profits until the advance is paid back and then shares profits with the band in a percentage split.

Now there are many different record deals and ways to split out the money. I’ll give you the basics here but knowing every type of deal isn’t that important for a small indie recording label because, honestly, your success is going to depend on how well you can negotiate a deal with a new artist.

The basic recording deal would mean at least $5,000 to the band plus all production and promotion costs over a 24-month period. The label coordinates all the studio time, band appearances and concerts, as well as promoting the album.

Once sales pay back that five-grand, the label will get anywhere from 15% to 65% of the profits and remember profits are what’s left after all those other costs. More typical is somewhere around a 40/60 split with the label getting the smaller chunk of the profits.

That means just getting an album produced can cost a minimum of $15,000 and easily into the hundreds of thousands. As an indie record label, you probably don’t have that…do you?

How Much Does it Cost to Start a Record Label?

If you don’t have at least $150,000 to start your record label, that’s a very conservative estimate of $15,000 per album for 10 bands, then you’re going to need to be creative to make your label successful.

Create your own recording studio with sound proofing and some mixing software. It won’t be pretty but it beats paying $150 an hour for studio time to record what could be 100+ hours for a single album.

Sign groups that have no other option…Ok, so let’s be honest. You’re not going to be able to attract the hot, up-and-comers that already have labels sniffing around. If you’re not able to offer tens of thousands to produce and promote an album, you’re best bet is finding the groups playing in bars and on the street corner. You might even have to give them a higher cut of the profits, something like 75/25 once all costs are recouped. Just be sure to sign them to long-term, exclusive contracts so you don’t lose them to a bigger label when they do hit.

Start a YouTube Channel for the label, this costs nothing and can make a lot of money! Music is one of the most popular categories on YouTube and a great way to promote your band for free. You’ll make money with ads shown before the videos, will be able to promote the band for live appearances and can direct people to a website to sell albums!

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Starting a Record Label with No Money

Starting a record label is really two steps, forming a business and then actually starting to sign groups and produce records. Let’s start with the basics of forming a business and things you need to watch, then a little about making your record label a success.

Forming Your Business

First is to write up a formal business plan and don’t skimp on this part. This is everything from how you will scout groups, produce albums and make money. Writing out a business plan will help clarify everything rather than just trying to keep it as ideas in your head.

You’ll want to register as a formal company including incorporating in your state, registering for a federal tax number and opening a business bank account. For some businesses, you can run everything under your own name but not a record label. There are too many legal risks in this type of business and you need to have a separate legal business to run it.

The best and most affordable type of business is going to be the limited-liability corporation or LLC. This means you run the business yourself but are legally protected from most risks.

You can start an LLC easy enough by filing in your state but you’ll need a lawyer to help write up contracts you’ll use to sign bands. This is going to be your single biggest expense starting out but DO NOT avoid it. You need a contract that is going to be air-tight and stand up under any challenge. If you do get a band to hit, you don’t want the contract to be voided when some high-priced attorney from one of the major labels pokes it in court.

Getting Started as a Record Label

After all that…you’re finally ready to start your record label. Before you rush out to start signing acts though, there’s some prep work you need to do.

You’ll need somewhere to record and that can get expensive. If you can’t get a discounted rate that’s affordable in a professional studio, you’ll need to consider creating your own studio.

You’ll also need a way to distribute the album and make money.

  • Create a blog for each group to start building a community of fans and make digital sales
  • Create a YouTube channel for the label
  • Create an account on the popular streaming services
  • Talk to local stores to promote albums with a poster and CDs
  • Create a list of contacts for everywhere your band can perform locally, and eventually expand the list to other areas

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Being able to show potential bands that you’ve got all this set up will help attract better talent. You still won’t be able to sign the best new voices but you should be able to sign a few acts with potential.

Once you’ve got your production and distribution set up, it’s time to sign acts. This means pounding the pavement, going to bars and clubs and wherever someone is making music. Be picky here, just because you’re a small indie record label doesn’t mean you have to sign every act you hear.

Don’t neglect those 21st century ways to promote a band like YouTube, streaming and through a blog. These are the lowest cost ways for a record label to get started and all it takes is for one band to hit big for you to make a lot of money. Don’t forget to reinvest profits in the business to do more promotion and sign bigger acts.

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