By Drew Amoroso
One of the least glamorous aspects of starting a fitness business is all of the logistical details. Taking the steps to form a business entity, obtaining the proper licenses, permits, and insurance and choosing a legal entity isn’t as exciting, but it’s incredibly important.
Despite the lack of glitz, one of the most important things an emerging fitness company can do to protect itself is to choose and maintain the right legal structure.
Why is the decision so important? The right legal entity will offer business owners a host of ways to protect the company, sustain its viability, and lay the foundation for structured and long term growth.
The two most common structures for fitness entities are:
- Limited liability company (LLC)
To assist, let’s also use a hypothetical new business owner, we’ll call her Val, who has just decided to open up her own yoga studio in San Francisco. Seeking to capitalize on her name recognition and short on creativity, Val has decided to call her new company Val’s Yoga Studio.
A corporation is the legal entity with which we are most familiar. A corporation, sometimes referred to as a “C-Corp”, is owned by its shareholders, who receive equity in the company (stock) in exchange for contributing money, property, or work to the company.
The shareholders (can be a single individual or several) elect a board of directors who are responsible for the major decisions of the corporation, and who in turn appoint officers (a president, secretary, and treasurer) that report directly to the board and manage the day-to-day business of the corporation.
For smaller corporations, one or two individuals generally serve a number of roles within the corporation, meaning Val could be the president, secretary and treasurer of Val’s Yoga Studio, Inc., as well as being the sole owner (stockholder).
An advantage of the corporation is that shareholders enjoy limited liability. In other words, a shareholder’s liability is limited to the amount of capital they have contributed to the company, and their personal assets are not at risk. For example, if Val’s Yoga Studio fails, the creditors of the corporation can only look to the assets of the corporation, the investment Val has made, but cannot pursue her for her personal money or property to satisfy those debts. So while her investment is at risk, her laptop, Vespa, and money in her savings account are not.
In addition to bankruptcy, this limited liability applies when the corporation is sued. For example, if a lawsuit against the company results in a judgment against Val’s Yoga Studio that is more than the company is worth, the suing party cannot go after Val personally. The corporation acts like a shield between lawsuits and the owners/officers of the company.
The more common structure among fitness companies is the LLC. Unlike a corporation, an LLC is not owned by shareholders, but rather by the members of the company. An LLC does not issue shares, but instead equity is given in the form of what’s called a membership interest in the company. For example, if Val owned the LLC by herself, she would have 100% of the membership interest, and if she was a half owner with her brother, she’d have a 50% membership interest.
A document called an operating agreement sets out the how the profits and losses are distributed among members, how the LLC is managed, and a whole host of other issues related to the rights and responsibilities of the members.
Like a corporation, the LLC provides limited liability protection to its members–-so Val would have no personal liability for the obligations of the LLC, and she would only be responsible for the amount of capital she contributed if the company ultimately failed.
Why This Matters
What are some of the benefits that come from choosing and maintaining the right structure?
- Limited Liability. A legal structure limits the liability of the owners–-which is particularly important for fitness businesses given the inherent risks in most fitness-related activities. Instead of Val acting as an individual, every time she trains someone she is acting on behalf of the company, and thus limiting her personal liability. Putting up a “shield” between Val’s personal assets and third-parties is one of the most important things she can do to protect herself.
- Spell Out the Rights and Obligations of Owners. Having a proper legal structure allows individuals and business partners to formalize, in writing, who has the ability to take certain actions on behalf of the company. For example, who has the right to bind the company, incur debt, hire and fire, and make other important business decisions? Other day to day obligations, like who will be handling the company financials, operations, programming, and relationships with employees, can also be spelled out. Drafting an effective operating agreement (or for a C-Corp, what’s called bylaws) can provide important clarity and rules for business owners.
- Facilitate Raising Money. Adopting the right structure allows owners to raise money, take on loans, and ensure that the company is properly financed. Individuals can do this, too, but if you do so in your individual capacity you cannot enjoy the benefits of limited liability.
- The Sign of a Mature Business. I often hear emerging fitness entrepreneurs mention that they can’t afford an LLC or that they’re too small of an operation to form a company. Generally speaking, adopting a formal legal structure signals that you are serious about protecting and growing your business. Fitness businesses of all sizes are at risk of incurring liability, and taking the time and resources to create and maintain a legal structure is well worth the investment.
So what should you do with this information?
- If you don’t have currently have a formal business structure, you should talk to an attorney who can help you look at your business and your goals, and help create the right entity for you.
- If you’re already operating as a corporation or LLC, continue to invest in that structure and learn how best to use it to your advantage.
NOTE: None of the information in this article is intended to create an attorney-client relationship. This article has been prepared for informational purposes only, does NOT constitute legal advice and is not a substitute for seeking legal counsel from an attorney.
Drew Amoroso is an attorney in San Francisco and the founder of Move Legal, a law firm dedicated to representing fitness, health and wellness, supplement, and paleo food companies. He can also be found on Twitter and Instagram.
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