In our series dedicated to corporate set up for gym owners, we have one more to cover. To date, we’ve reviewed Joint Ventures, General Partnerships, Limited Partnerships, Limited Liability Partnerships, and Corporations. For the final installment, we are going to cover the pros and cons on the Limited Liability Company (LLC). Most gym owners find the LLC to be the most advantageous corporate structure for their new gym business. It provides more personal protection than any kind of partnership. Additionally, it requires less formality than a corporation. However, that doesn’t mean it is automatically the best option for you. Here are some pros and cons to consider:
Pros of filing an LLC for gym owners:
- Personal liability protection: One of the main advantages of filing an LLC is that it provides personal liability protection for the gym owner. This means that if someone sues the gym or if the gym faces financial difficulties, the owner’s personal assets (such as their house or car) are protected from being seized to pay off any debts or legal settlements.
- Flexibility in management: An LLC allows the gym owner more flexibility in management. For example, a sole owner, or a group of managers, could manage the LLC. This management structure allows for a more democratic decision-making process. That can can make it easier for gym owners to bring on new partners or investors in the future.
- Tax benefits: An LLC allows for pass-through taxation, which means that the gym’s profits and losses are reported on the owner’s personal tax return. This can result in tax savings, as the gym is not subject to double taxation (taxation at both the corporate and personal levels). It also gives the gym owner the ability to elect an S-corp tax designation. That designation can provide additional tax savings as the business develops.
- Credibility: Filing an LLC can give your gym more credibility and legitimacy in the eyes of potential clients, vendors, and investors. It can help you establish a more professional and serious image for your business.
Cons of filing an LLC for gym owners:
- More paperwork and administrative tasks: Filing an LLC requires more paperwork and administrative tasks than running a sole proprietorship. This is the formality we often talk about. This can include filing annual reports, maintaining corporate records, and paying fees to the state.
- Higher formation costs: Filing an LLC can be more expensive than other business structures, such as a sole proprietorship or partnership. This is due to the fees associated with filing the necessary paperwork and registering with the state.
- Limited liability protection may not be absolute: Although an LLC can provide personal liability protection, there are some circumstances where this protection may not be absolute. For example, if the gym owner engages in fraudulent or illegal activity, they may still be held personally liable for any damages or debts.
- Limited flexibility in ownership: An LLC may not be the best option for gym owners who plan to bring on a large number of investors or partners, as there are restrictions on the number of owners an LLC can have.
Filing an LLC can provide a number of advantages for gym owners. It is the corporate structure we recommend most often. However, it isn’t the best for every situation. There are also some potential drawbacks to consider. The gym owners proper corporate set up doesn’t stop at filing the LLC. The owners of the LLC need an operating agreement. Additionally, the owners need to maintain a level of formality with business records. It’s important to weigh the pros and cons carefully and consult with a legal or financial professional before making a decision about how to structure your gym business.