When you are starting a business, you have to limit your upfront expenses. However, you also have to be careful where you’re cutting corners. We constantly run into gym owners who tried to save money upfront by not forming a corporation, like an LLC. That money saving decision is now costing them big time. We have even seen instances where not to create a corporation has cost gym owners tens of thousands of dollars.
Sole Proprietorship
When you operate a business that is not a registered corporation, it’s called a sole proprietorship. You’re essentially asking people to pay you personally for a product or service that you are providing. The money comes to you and can go into your personal bank account. From a tax perspective, you pay income taxes on every dollar that you earn. Most small businesses operate in this kind of tax structure whether they are corporations or not. However, the big issue for us is the lack of legal protection.
Legal Exposure
When you own a business, you assume a certain level of liability. First, anytime you take somebody’s money in exchange for a product or service, you are exposing yourself to being sued by a disgruntled customer. This is especially true in service industries like fitness facilities where people are paying you for a certain result that can never be guaranteed. Second, there is always a danger that your services or training may injure one of your customers/members. If they believe you caused their injury, they may sue you for medical bills, loss of income, loss of enjoyment of life, and more.
Why You Need a Corporation
This is why it is incredibly important for you to spend money in the beginning to set up a legal corporation. When you are operating as a sole proprietorship, you are exposed to this legal liability. That means if a customer is successful in a lawsuit against you, everything you own may be used to pay for that lawsuit. On the other hand, if you have a legal corporation, that disgruntled customer is limited to the assets of the corporation, not your personal assets.
To protect your personal assets, you need to form a Limited Liability Corporation, or LLC. Think of it like a legal shield. A single individual, or multiple owners, may set up an LLC. The process to do so is relatively simple. The primary advantage of forming an LLC from our perspective is the legal protection it provides. You call it “Limited Liability” because it shields you, the owner. Once the LLC is formed, it is considered to be an “individual” in the eyes of the law. That means it can enter any type of business transaction or contract. When an LLC enters a business contract, the LLC becomes the responsible party for completion of the contract. Thus, any violation of the contract puts the LLC as the liable party, and not you.
So, are you starting a business? If so, spend the money to form a corporation. There are companies out there, like us, who can help you navigate the process. We promise it will benefit you more than spending that money elsewhere.
