A business needs a name. It needs a purpose. It also needs an EIN, liability protection, and insurance—am I going too fast?
There’s a lot behind choosing a legal entity, especially for a CrossFit gym. Each entity type has a significant difference from another, including tax advantages, information about directors, annual meetings, and more.
Without getting in over our heads, let’s discuss the different types of legal entities, how difficult they are to start, maintain, and which one you’ll (likely) want for your CrossFit gym business.
What Are Legal Entities and Why is it Important to Choose the Right One?
A legal entity is the way your business is created in the eyes of the law. That sounds hyper-official, but what it boils down to is the LLC or Inc. at the end of a business title.
But what does it mean, and why is it so strikingly important? There’s a few reasons:
Taxation
Taxes are structured differently for different legal entities. That means that S-CORPS will be taxed differently to LLCs, and so on. This is imperative when you begin a gym, because as your business scales, so will your taxes.
You have to make sure that the taxes make sense for your business model and how you plan to grow.
Be sure that you have your business plan in place before you decide on which legal entity to pick so you know how to anticipate taxes, and work it into your long-term plan.
Liability
Liability is the difference between losing a business versus losing your personal property and income. If a company is sued and it goes under, you’re still protected as an individual.
Liability varies, but for this reason, LLCs, or limited liability corporations, are the most common legal entity that gyms (and a host of other businesses) choose to operate under. Liability is major; don’t gloss it over.
Paperwork
Setting up a legal entity could be a one-afternoon headache, or a continual migraine that you have to constantly medicate.
Paperwork gets complicated when there are more cooks in the kitchen, which is why sole proprietorships are easy to start up (but lack proper liability) and corporations are difficult to set up.
In some cases, you might need someone to manage your paperwork for a few weeks per year, and then you roll more cost into it.
Hierarchy
Certain legal entities are formed in a way that you can know who’s in charge of what area. This is unlikely with a CrossFit affiliate gym, but if you ever turned into the next Gold’s Gym, you would want to have certain people in certain roles to fulfill specific company obligations.
This is where you get titles like CEO, COO, and other acronyms for very important roles within a company.
Funding Opportunities
Unless you present yourself as a legitimate business, you’re going to have a hard time finding opportunities for serious funding.
Some businesses begin and start strong on the back of angel investors or capital/loans, so if those are options you’re willing to explore, you have to come before investors with a serious proposal in mind.
Registration
Registering some entities is simple, while others are more difficult and require more fees to get started. The more hands in the cookie jar, the bigger the registration process is going to take. An S-CORP with an entire board of directors has a lot more to go through than your typical sole proprietor.
That’s okay, by the way—it’s how it should be, but the process can be daunting to anyone who’s trying to set themselves up for a future corporation.
Here’s the trick: you can register as an LLC now, and then create a separate corporation later which owns the LLC as a holding. Two birds, one stone.
List of Legal Entities
There are three main legal entities you will encounter while setting up your CrossFit affiliate gym. Beyond these, there are other legal entities, though they don’t often affect or impact businesses in this space.
Sole Proprietorship
A sole proprietorship is an individually-owned business that is not incorporated or protected by anything. You can form a one-person LLC, which will protect you from liability, but it will then be treated as a corporation instead of a sole proprietorship.
SPs are designed for one-person operating crews from the ground up that want to be protected and treated as a business, while separating the business entity from their personal information and name.
Limited Liability Corporation (LLC)
An LLC, or limited liability corporation, is a state-specific company. These operate differently depending on which state you’re in and will be classified differently.
You can be a one-person LLC, which is quite common, but you must understand that your protection may require additional forms (such as the 8832 form) to be considered a corporation in all circumstances. LLCs are arguably the best way to begin a legal business.
S Corporations (S-CORPS)
S corporations are different from any other entity. These have specific ways to avoid certain double taxation on corporate income levels, as well as operate domestically and allow for shareholders.
Shareholders can boost the value of your company, although this isn’t a route that everyone is going to take for many other reasons.
S CORPS are also limited to the number of shareholders that they can have. This is not a traditional selection for small or even most medium-sized companies.
Factors to Consider When Choosing a Legal Entity
Before you can make your decision, you have to understand how it’s going to affect your business model, and what you stand to gain from your choice.
- Taxes: First and foremost, and we cannot urge this enough—assess your tax situation before you sign up for a certain entity. It could mean that the company has money and makes profits, but you don’t make enough to take home for your expenses, and that’s a problem. Choose the right entity to make your life as easy as possible while still benefiting your company.
- Liability Coverage: A sole proprietorship doesn’t have liability, but a one-person LLC does. We’ve outlined the differences, but we need to stress how important it is to be protected from liability in a volatile industry such as fitness. Trends change, locations can be compromised, and sometimes it’s out of your control. You don’t want to go under just because your company or business runs into some hardships.
- Easy to Build Equity: Entity equity isn’t what many think it is. It’s stock options that you can give to your employees as a form of profit-sharing (sort of). It gives them value beyond a paycheck and can be a great tool for employee retention. This is something you can’t do unless you have the right legal entity.
- Small Business Stock Exemption: This one is pretty amazing. It means that stockholders can exclude gain in the first five years of their stock holding, however, this is specific to C corporations. Still, it’s an amazing tool to help build trust in your company and allow it to grow with limited liability to your stockholders. It also isn’t traditional, so since you’re not going public, there’s no board of directors that can push you off the pedestal. It’s a pretty good spot to be in.
- Local Laws: Some states are havens for registering businesses, such as the state of Delaware. A lot of people actually incorporate their businesses in Delaware from just about any state in the US, and foreign entities will actually use Delaware agents to register their businesses. The point is this: know the state laws for incorporation so that you can fully understand what you have to do to uphold that business registration. It will affect taxes and more.
Legal Entity of Biggest Gyms
You might be surprised to find that some of the biggest gyms actually change hands quite often, such as Gold’s Gym. It depends on who buys it and how that entity legally changes.
CrossFit is an LLC, and not an S-CORP. The THENX Fitness Studio is a popular calisthenics gym run by Chris Heria, and that is also an LLC. It seems that an LLC is the right way to go for most notable, large gyms.
Your business will have its own unique points and you will have to factor that in while figuring out which entity works best for you.
It’s Time to Decide
Now that you know the ins and outs of each legal entity type, it’s time to pick which one works best for your goals and business plan.
For affiliated gyms, such as CrossFit gyms, a corporation doesn’t really make sense since you’re more of an independent franchisee than anything else.
While many will choose to go with a sole proprietorship, please keep in mind that liability protection through an LLC is extremely important.
Your gym isn’t immune to accidents, misunderstandings, or incidents just because you try your best. Go with the right legal entity for your gym right from the start.
