Selecting the gym corporate structure for your new fitness business is an important decision before you ever open your doors. Whether you’ll be an S-Corporation, a C-Corporation or a LLC (Limited Liability Company), understanding the differences is imperative.
If you’re like most gym owners, you don’t have a financial or taxation background and the options can be confusing. So we’ve put together this simple guide to help you understand which one benefits you most.
Below is a brief outline of the three gym corporate structure options, as well as information shared by other gym owners.
Gym Corporate Structure: C-Corporation
A C-Corp is the most common type of business in the United States. It’s a separate legal entity that essentially protects the owner’s personal assets (i.e. limited liability).
In the case of a C-Corp, the organization/company gets taxed on income at the corporate level, not the owner personally. Money the owner takes from the company becomes a dividend, which the owner pays personal income tax on. So essentially, the revenue your company generates gets taxed twice.
General Advantages To Being A C-Corp Include:
- Limited liability for the owner. The owner’s personal assets are protected if something goes sideways with the company.
- Unlimited growth potential and the ability to sell equity to raise money.
- No limit on the number of shareholders. This is likely irrelevant for a gym, which is unlikely to ever have hundreds of shareholders.
- Various tax deductions.
- Allowed to divide up voting rights, meaning rights don’t need to be equal among shareholders. Again, this is unlikely to be relevant to a small business.
Potential Downsides To Being A C-Corp Include:
- Owners seeking to be paid dividends. This is almost always the case for a small business owner, who generally needs to take a salary from the business.
- Owners will pay more in taxes because you’re taxed at both the corporate and personal level.
- There are more expenses as a C-Corp than as a LLC.
- More regulation will be enforced than both S-Corp and LLC.
In general, C-Corps are most beneficial gym corporate structure for start-ups.
To become an S-Corp, you need to file a form with the IRS. If you have shareholders, all must consent before filing to become an S-Corporation.
In the case of an S-Corp, business profits and losses get passed through the corporation onto the owner. You’ll report only this on your personal tax return, meaning you only pay taxes once - not twice - like you would with a C-Corp.
Advantages To Being A S-Corp Include:
- Because of the pass through taxation, you eliminate the double taxation that happens in a C-Corp.
- You only have to file taxes once a year, instead of quarterly.
- Ability to raise capital by selling shares.
- If you choose to sell your business as an S-corporation, taxable gains are usually cost less than a C-Corp.
Potential Challenges To Being A S-Corp Include:
- You have to be an American citizen (and so do all shareholders).
- Closer IRS scrutiny and you pay higher expenses.
- The number of shareholders are limited to 100. This likely doesn’t affect a small gym owner.
- S-Corps are limited to one class of stock, meaning all shareholders have equal voting rights.
Something else to note about choosing a S-Corp for your gym corporate structure: Each state has different laws, and some states don’t even recognize S-Corp status. This means your business may be an S-Corp for federal tax purposes, but not at a state level.
LLC (Limited Liability Company)
An LLC tends to offer greater flexibility than being either an S-Corp or a C-Corp.
Like an S-Corp, tax-wise an LLC is a pass-through tax. Business income and expenses get reported on the owner’s personal tax return, and you only pay tax once. If you’re the sole owner, income and expenses will be reported on Schedule C of Form 1040, as if you were a sole proprietor. If you have a business partner, then you’re taxed as if it’s a partnership.
Although this might sound just like an S-Corp, there are some differences. LLCs gets taxed slightly different than S-Corps when it comes to employment taxes. However, this doesn’t have to be the case. If you’re a LLC, you have the option to be taxed as if you were either a C-Corp or a S-Corp.
As we spoke with other gym owners, we found an overwhelming consensus to organize their gym corporate structure as an LLC but get taxed like an S-Corp.
However, if your plan is eventually to open multiple locations and have numerous partners, the trend is to both organize and file taxes as a S-Corp. This is less common, as most gym entrepreneurs intend to own just one location.
Three Biggest Reasons For Being A LLC And Filing As S-Corp:
- You pay less taxes.
- Limited liability for you as the gym owner. Your personal assets are protected if the business goes under.
- The filing fee is lower when you’re a LLC. However, these fees differ from state to state.
Three Reasons A Minority Of Gyms Choose To File As C-Corp:
- C-Corps have retirement savings options not available to LLCs and S-Corps.
- It’s less expensive to leave profit in a C-Corp, as you pay a lower tax rate.
- If you do pay out all of your profits via salaries to owners, you can avoid double taxation.
One gym owner explained he chose to be a C-Corp because he was able to roll his personal 401K into the C-Corp. Then he was able to use those funds to finance his business, tax free. In exchange, the corporation received shares of the company’s stock. Basically this means his corporation is owned by his own personal 401K plan.
At the end of the day, your choice of structure comes down to your own personal situation. There’s likely an argument for each depending on your circumstance.
We strongly recommend speaking with a tax professional and other experienced gym owners before finalizing the corporate structure of your business.
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