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Most take it out of the artists income. Once the label gets the album onto the shelves and the money starts coming in, they get all of their expenses back. This also usually includes the signing bonus given to the artist. The artist doesn't start making their percentage until the label has recovered all of their expenses. Not all contracts work this way, but most do. Smaller independent labels will have better terms than these.

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Q: How do record labels recover expenses?
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