You’re out there getting things done in the gym, and you’re ready to start your own fitness business. This could be a gym, a personal training business, a franchise, as a fitness instructor or coach. Should my fitness business be an LLC? How hard can it be? You can just start charging a fee for training someone right? Not so fast.
The formation of a business entity has liability and tax consequences. Taking time to make this decision about your business entity and structure can prevent unnecessary cost and headaches. While the specifics will vary from state to state, there are some general considerations that will help you make a good decision about forming a business entity that would be best for your circumstances.
If you simply start charging customers for your work (not recommended!), you will have made a choice, even if you don’t realize it!
Evaluating Your Options
A Sole Proprietorship
is the default option if you don’t make another entity choice as an individual. Where two or more people are involved, the default option is partnership. In these cases, there is no protection for an owner’s personal assets. Owners of sole proprietorships and partnerships remain fully liable for the debts and obligations of their businesses.
is a legal entity that is separate and distinct from its owners. A corporation has the right to enter into contracts, loan and borrow money, sue and be sued, hire employees, own assets and pay taxes. It is often referred to as a "legal person.” Owners of corporations are not personally responsible for business debts. Many small businesses shy away from the corporation entity form because setting one up is generally more costly than other types and requires some additional maintenance. This is the type larger businesses choose because they have more fundraising and investment options available to them.
The Limited Liability Company (LLC)
business entity form is the lowest maintenance entity type that provides any protection for personal assets of the business owner. An LLC can be comprised of a single individual, a partnership, multiple individuals, or a corporation. It is the most widely used business forms for small businesses.
You may have heard people talking about another entity type, the S-Corp
. This relates to a tax election for the owners of an LLC and if you want to find out more and whether this is a good option for you, you should speak with your CPA.
Benefits of an LLC
The primary benefit of an LLC business structure is that the owners enjoy the same personal protection from responsibility for business debts as owners of Corporations. The liability limit of LLCs provides a significant incentive for individuals in partnerships or sole proprietorships. With limited liability, in the off chance your fitness business LLC goes bankrupt, creditors would be limited to the business assets instead of your personal assets. With an LLC in place, a lawsuit or other financial liability may result in the loss of your business assets, but your family home should be safe. This protection can be lost, though, if the business owners act irresponsibly, illegally, or unethically in certain cases that must be proved in a court of law or an out-of-court settlement.
In addition to the limited liability and the flexible tax options, the LLC is an attractive option to many business owners because it usually doesn’t need to comply with many of the legal formalities that govern corporations such as annual reports, director meetings, and shareholder requirements.
For many businesses, especially small businesses, the benefits and flexibility of LLCs make it a better choice than other business forms.
One of the greatest advantages of the LLC business form is that they can elect how they will be taxed. The default taxation for an LLC depends on how it’s structured. Most of the time, if an individual forms an LLC, it’s taxed as a sole proprietorship. If a partnership forms an LLC, it’s taxed as a partnership. Whether your business is taxed as a sole proprietorship or you elect to have your fitness business LLC taxed as a corporation, both of these approaches can have big tax advantages, depending on how much income you personally want to take and how much you plan to reinvest in your emerging fitness business. Speak to your CPA for more information about tax elections and LLCs.
Another tax advantage of the LLC form is that it allows you to set up both retirement funds and life insurance policies with greater contribution limits so you can set aside money for your future and your family.
No matter how you elect to have your fitness business taxed, don’t forget that business expenses can be deducted. Most importantly, you can deduct the cost of forming your LLC. Make it a habit to hang on to all your receipts and invest in a scanner to organize them electronically (keep the receipt for your scanner purchase too!).
How do I register/form an LLC?
To create your LLC, it is often as simple as filing articles of organization with the Secretary of State (or equivalent) and pay the filing fees required. However, in order to make sure that you are protected and the corporate veil is lowered, when an LLC is formed, the owners should adopt rules, bylaws, and operating agreements. We offer a DIY LLC kit
that walks you through the process.
Maintenance & Ongoing Administration
Owners of LLCs must follow most of the business requirements for a corporation including keeping business accounts separate from personal accounts, being able to show evidence of sound record-keeping and appropriate licensing. State laws lay out record-keeping and licensing requirements (and ongoing fees!). For the LLC members to maintain limited liability, the state requirements for ongoing maintenance of the LLC must be met. If you fail to maintain all of these requirements, creditors may be able to reach your assets to satisfy business debt and liabilities – this is known as “piercing the corporate [or LLC] veil”. Check out more discussion about liability risks of operating a fitness business
Ready to start (or fix up) your fitness business?
You’ve already worked hard for the body you’ve got. That was hard. Now, you’re ready to set up your fitness or coaching business for success by establishing it as an LLC.
Now, what are you waiting for?