Your passion for fitness is in abundance and you’re ready to start your own fitness business. But why does it need to be an LLC?
How hard can it be? Just start charging a fee and throw up a facebook page right?
The formation of a business has liability and tax consequences that continue for years to come. It pays to be thoughtful about your business structure from the outset to prevent unnecessary cost and headaches. The specifics will vary from state to state, however there are some generalities that you can consider.
This is especially important for fitness businesses.
We are directly impacting the health and wellness of consumers, which increases liability.
If you start charging customers for your work (not recommended!), your loosely formed business structure will likely default to that of a sole proprietor or partnership. Did you know that owners of sole proprietorships and partnerships remain fully liable for the debts and obligations of their businesses? On the other hand, those who own corporations are not personally responsible for business debts.
Many small businesses shy away from the corporation form. Getting up a corporation can be a bit complicated, is generally more costly, and requires a number of ongoing formalities.
Let's set the money part aside. If you don't set up your business into a structured entity, you're personally liable for issues that arise.
Evaluating Your Options
For solo-owned or small fitness business, often the sole proprietorship business formation is too small, and the corporation business form is too big. Like Goldilocks, you need to find a company form that is “just right.” Fortunately, there’s another option.
Enter, the Limited Liability Company, or more commonly known as LLC.
The LLC business formation provides a flexible compromise between the two. An LLC can be a single individual, a partnership, multiple individuals, or a corporation.
In addition to the limited liability, there are flexible tax options. You can be taxed as a sole proprietor (without the liability issues), or as a corporation (without all the formal state corporation requirements).
The LLC is an attractive option because it usually doesn’t need to comply with many of the legal formalities that govern corporations (annual reports, director meetings, and shareholder requirements).
For these reasons and more, Limited Liability Company (LLC) one of the most widely used business forms for small businesses.
Benefits of a Limited Liability Company (LLC)
The primary benefit is that the owner(s) enjoy the same personal protection from responsibility for business debts as owners of incorporated businesses. Forming an LLC takes about the same effort and cost as properly setting up a sole proprietorship or partnership, yet provides owners with the same level of protection as a corporate business structure.
To create your LLC, you will file articles of organization with the state and pay filing fees. The owners should then adopt rules, bylaws, and operating agreements.
LLCs have to follow most of the business requirements for a corporation. These include maintaining business accounts separate from personal accounts, and keeping up with record-keeping and appropriate licensing. State laws lay out record-keeping and continuing licensing requirements. 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”.
The liability limit of LLCs provides a significant incentive for individuals in partnerships or sole proprietorships. Creditors are limited to only your business assets instead of your personal assets if filing bankruptcy. With an LLC in place, a lawsuit or other financial liability may clean out your business assets, but your family home should be safe. If the business owners act irresponsibly, illegally, or unethically this protection can be lost.
For many businesses, especially small businesses, the benefits and flexibility make it a better choice than other business formations.
Death and Taxes
One of the greatest advantages of the LLC business form is that they can elect how they will be taxed. Most of the time, the base group form decides the default taxation. Sole member LLCs will be taxed as a sole proprietorship, and partnerships as a partnership.
For our purposes, let’s assume you are the sole member of your new LLC (sole member LLC). You decide whether to follow the IRS default and file your business taxes as a “disregarded entity”, or elect to be taxed as a corporation.
Disregarded entity: For tax reporting purposes., businesses will be treated like a sole proprietorship.
Using Schedule C, the income will be passed through to the individual tax return. Your fitness business, with corporate taxation, will be taxed at a lower corporate rate for the first $75,000 of income.
Another advantage is that you can set up both retirement funds, and life insurance policies with greater contribution limits.
Either option will give you big tax advantages. It will depend on how much income you personally want to take, and how much you plan to reinvest in your business.
You may realize even more tax benefits by paying yourself from your LLC by paycheck. As an LLC taxed as a corporation, you may pay yourself from the company through payroll, and avoid self-employment taxes. The company will still be responsible for a portion of the tax bill, so you make sure your LLC budgets for that payment each reporting period.
Everyone’s situation is unique, so consult with a CPA or other tax professional to drill down into your financials to understand which option is best for you.
Remember: Deduct business expenses.
Most importantly, you can deduct the cost of forming your LLC. Make it a habit to keep your receipts, and invest in a scanner to organize them electronically (the scanner is also deductible!)
Disclaimer: Take the time to evaluate LLC as an option, and make sure to consult a local attorney.
Need some help starting your business? Check out our quick legal checklist for starting your fitness business!