How Elijah Wood became lord of the record label

The childlike Hollywood star Elijah Wood, 27, the one with the massive eyes, is better known for wearing prosthetic feet in his role as the hobbit Frodo Baggins in the Lord of the Rings film trilogy than he is for signing pop bands. He is sitting bolt upright in the corner of a London hotel restaurant, and is midway through a hamburger when the American singer Heloise Williams arrives. She is the kooky frontwoman of the pop band Heloise and the Savoir Faire, and is signed to the record label that Wood set up in 2005.

Williams is bubbly, with platinum-blond hair, and is wearing a canary-yellow satin minidress and bright red tights as she rushes up sweetly to give her record boss a big kiss. Wood, who looks otherworldly and has an intense stare, jumps up to greet his protégé; she has a light and unpretentious air about her.

Heloise and the Savoir Faire are a New York underground band from Brooklyn, whose disco-punk-rock is adored by Debbie Harry. Harry is even a guest vocalist on two of the songs on the debut album Rats, Trash and Microphones, to be released in early June.

We move upstairs to a hotel suite where it is less noisy. Wood smokes a cigarette out of a window, and Williams sits on a sofa blowing her nose dramatically.

"I didn't start a record company out of need," says Wood. "Certainly it's not the smartest thing to do financially. The idea for a label came out of a pure place. I've been a huge music fan for a long time. In part I started it due to a certain amount of frustration of being a fan of certain bands and realising that those bands weren't as well known as I felt that they should be. I thought it would be interesting to start a small independent label to make a small contribution to the world of music."

Heloise's is the second band to join his Simian operation. In 2007 he released the US indie-pop band Apples in Stereo's album, New Magnetic Wonder. He also recently put in a bid for Radiohead – "I emailed their management knowing I had no chance in hell," he says.

He runs his independent record company from home in Venice Beach, LA. "I had no infrastructure when Apples in Stereo approached me. They heard I wanted to start a label," he explains. "So I got an imprint of Yep Roc records, which allowed me to get started. As the label grows I will need to employ people and get proper office-space," says Wood.

He is in the UK to promote his new movie, The Oxford Murders, which is out on 25 April, a thriller with John Hurt, but he is fitting in a bit of promo for the band while he is at it.

Although both Wood and Williams are huge Prince fans – which is evident from Williams' 80s-inspired music – the two of them seem an unlikely pair; one a Hollywood star, the other a refreshingly plump exhibitionist from Minneapolis. Williams, 34, who met Wood through his girlfriend Pamela Racine, a dancer/drummer in gypsy punk band Gogol Bordello, takes a back seat in the interview. A former roadie for Peaches before she signed to Wood's label, she is far less provocative in person than she is live on stage. When, later that night, she performs at the Punk nightclub in London's Soho, where Kate Moss had her birthday bash in January, her theatrical showmanship takes on a life of its own. She stamps her feet and struts the stage like a sexual predator and belts out songs in a strong, earthy voice, including the beautiful track "Canadian Changs" – a song Harry sings harmonies on for the album. She is wearing a very short, black, sequinned minidress and a sporran pouch made of fur that dangles from a chain attached to her waist.

Her regular dance troupe – Sara Sweet Rabidoux and Joe Shepard (who also plays keyboards) – add a cabaret feel to the show. The dancers look as if they are dressed for a nativity play as they stand on the front of the stage. Rabidoux wears a white bed-sheet-turned-dress and a large, gold, cardboard-cut-out star necklace, before stripping off to reveal suspenders. Shepard dons a turban and shades, before turning into a camp sailor. Wood is at the front bopping up and down supportively.

Although Wood says he has lost count of the films he has been in since he hit the big screen at the age of eight, he remembers that he has "over 4,000 CDs" in a record collection to die for. "When I moved to my new house three year's ago there was no built-in storage space so I haven't put them anywhere yet."

He befriended the Flaming Lips and the White Stripes, and Joel Cadbury from South, whose helpful tips were always on tap when he came up with the idea of starting a label. "My musician friends were incredibly supportive. They all thought it was really cool." It was around the same period in his life that he performed the voice of Mumble in the penguin epic Happy Feet.

It seems that this foray into the music world is definitely an extra-curricular activity for the film star. Nevertheless, he looks very hopeful when I ask him if Heloise and the Savoir Faire will be a mainstream success. "The music covers so many genres that it is translatable to a wide audience," he says. "I just fell in love with her personality as soon as I met Heloise and then when I saw her play live I was blown away."

The band also includes James Bellizia, guitar, Jason Diamond, bass, and Luke Hughett, drums. For Williams – a dance music fan, who struts her stuff with confidence and occasionally shrieks like Prince in songs – the biggest surprise has been becoming mates with Debbie Harry, after the star caught their set by chance at the Knitting Factory in New York a few years ago. "She came up to me and said she loved my voice. I was shocked as I was supposed to be in awe of her – not the other way around. She wanted me to sign my CD and it was a bit surreal. She likes the costumes and the sense of humour of what we do."

Since then they even go to see Broadway shows together, as well as collaborating on music. " I was working on a song called "Ambergris" – it's a substance found in sperm whales and used as a fixative in perfumes – which I thought she would like, and she was like, 'oh actually that's the name of my first boyfriend's band'."

And what's the plan for Wood? "I just want to facilitate the bands that I'm working with – just to serve them as best I can. It's not about my ego."

'The Oxford Murders' is out 25 April. 'Rats, Trash and Microphones' is out in early June

Watch the trailer for The Oxford Murders