We’ve been explainig the different types of corporate structures in recent articles. To date, we’ve covered Joint Ventures, General Partnership, Limited Partnerships, and Limited Liability Partnerships. For the most part, we’ve come to the conslusion that none of these are preferred for gym owners. For the last two in this series, we will cover corporate structures that should be considered by gym owners. In each article, we will cover the pros and cons.
Separating the Company from the Owners
When starting a business, a gym owner may consider forming a corporation. One of the primary features of a corporation is that it is a legal entity separate from its owner(s). This is different than the various partnership options we’ve covered in past articles. In legal partnerships, the entity is not necessarily separate from the owners and the owners maintain liability. When gym owners form a corporation, it primary goal is to shield the individual owners, and their assets. For example, when a gym member wants to file a lawsuit, it has to file against the corporation, not the owners.
Gym owners must consider a number of pros and cons when deciding if a corporation is the best corporate set up for them. Here are the most common coniderations:
Pros:
- Limited Liability: One of the main advantages of a corporation is that it offers limited liability protection to its owners. This means that the corporation protects the personal assets of the owners from the liabilities and debts of the corporation. This is particularly important for businesses that operate in high-risk industries. As a gym owner, you do operate an inherently dangerous business. In some instances, the type of business you operate exposes you to a lot of liablity.
- Perpetual Existence: A corporation has a perpetual existence, meaning that it can continue to exist even if the owners or shareholders die or leave the company. Corporations can provide a sense of stability and continuity. Where building larger gyms, this can be reassuring to employees, customers, and investors.
- Access to Capital: Corporations have easier access to capital than other business structures. Gym owners can issue stocks or bonds to raise funds. This makes it easier to attract investors to finance growth.
- Tax Benefits: States and the IRS tax corporations differently from other business structures. That means possible lower tax rates and more favorable tax treatment. Additionally, corporations can deduct a wider range of expenses, such as employee benefits and retirement plans, which can further reduce their tax burden.
Cons:
- Complex Formation: Filing for a corporation can be a complex and expensive process. It requires ym owners to file articles of incorporation with the state, create bylaws, and issue shares of stock. This can be a daunting task for gym owners who may not have the time, resources, or expertise to handle this process on their own. The formality of a corporation often makes this corporate structure unattractive to gym owners.
- Increased Regulation: Corporations are subject to more regulation than other business structures, which can be time-consuming and costly to comply with. This includes annual reporting requirements, shareholder meetings, and other legal formalities. When the gym owner fails to comply with all of the legal formalities, it may render the corporation obselete. In such case, the gym owner’s personal assets are once again exposed.
- Double Taxation: Unlike other business structures, corporations are subject to double taxation. This means that the corporation pays taxes on its profits, and then shareholders pay taxes on any dividends they receive. This can result in a higher overall tax burden for the company and its owners, despite the tax advantage metioned above.
- Lack of Flexibility: Corporations have less flexibility than other business structures, as they are required to follow strict rules and regulations. This can make it difficult to make changes to the company’s structure, operations, or ownership. Like the complex formation, this lack of flexibility often makes corporations unattractive to gym owners who just want to run their gym and train clients.
There is a lot to consider here. Filing for a corporation can offer many benefits, such as limited liability protection, perpetual existence, access to capital, and tax benefits. However, it also has some drawbacks, such as complex formation, increased regulation, double taxation, and lack of flexibility. Before deciding whether to file for a corporation, it is important to weigh the pros and cons carefully. We also suggest that you consult with legal and financial experts to ensure that it is the right choice for your gym business.
