My $3.3 million mistake
Ever since I was a teenager, my dad would occasional y send me things to sign—
things for the family business. I didn't understand the complexities of it, and
didn't need to, so I'd just sign without question.
Four years before I started CD Baby, as I was recording my first album, I needed
to borrow $20,000 to buy studio equipment. My dad said, “Instead of my lending
you money, start a corporation. Then the family business can buy shares in your
corporation.”
So I did. Because my band was cal ed Hit Me, I cal ed the company Hit Media
Inc. My dad's company bought some shares, and that helped me finish my
album, and I continued to run my record studio at a profit.
Four years later, I was living in Woodstock, New York, and started this little
hobby cal ed CD Baby.
The first time I got a check addressed to “CD Baby,” I brought it down to the
bank and told the bank tel er, “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 an alias 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 ten minutes and $100, so I said OK.
Four years later, CD Baby was doing real y wel . A few mil ion dol ars in sales.
Half a mil ion dol ars in net profits. I paid my dad back the $20,000 I had
borrowed.
I cal ed up my accountant in January. “OK. I got al the Quicken books balanced.
Should we file early this year?”
He said, “Oh, you don't need to file. CD Baby is just a line item on your dad's
company's tax return.”
I said, “Uh... what?”
“You didn't know that your dad's company owns 90 percent of CD Baby?”
“Uh... what?”
“You should talk to your dad.”
Yes, it turns out that when I borrowed the $20,000 eight years earlier, I didn't
realize that I got the $20,000 by sel ing 90 percent of Hit Media Inc. to my dad's
company.
Then because the bank tel er advised me to make CD Baby an alias of Hit
Media, that meant my dad's company owned 90 percent of CD Baby as wel .
FFFFffff.... SSSSssss.... RRRRrrrr.... Oh, what a horrible sinking feeling. What I
thought was my company al these years was not actual y my company. I owned
only 10 percent.
I couldn't be mad at my dad. He was doing me a favor back then and thought I
knew what I was signing. Nobody thought my little hobby was going to turn into
a multi-mil ion-dol ar business.
It was my fault for not reading what I signed. My fault for letting a bank tel er's
quick advice make that major decision for my business structure.
What made it even worse is that I couldn't just buy the business back for the
original $20,000. The IRS wouldn't al ow that. The only way was to pay ful
market value, as determined by an outside valuation company.
In the end, I had to pay $3.3 mil ion to buy back that 90 percent of my company.
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