Opening a gym can’t be that hard, right? You have a passion for helping others and you’re simply setting up a business to capitalize on that.
The good news is that there are plenty of ways to employ a DIY strategy when you’re first getting started. But unfortunately, too many entrepreneurs take that route when it comes to the legal side of things.
And as Matthew Becker explains, that can lead to missteps and put your business at risk. Becker is a gym owner, a lawyer and the owner of GymLawyers.com, a company aimed at educating gym owners about legal matters that impact their business.
“For whatever reason, gym owners like to try to piecemeal, and determine for themselves what’s important and not important,” said Becker.
He explained further that, when you’re opening a gym, you might just not know exactly what needs to be done legally, or you might think it’s going to cost a ton of money. As a result, unanticipated issues can arise along the way, and can even be a hinderance if you want to sell it one day.
The Four Legal Steps in Opening a Gym.
The truth is, there are lots of gym legal tips to consider along the way. But there are four imperative steps to take as you get started. And they apply whether you’re opening a brick-and-mortar location or starting a virtual training business online.
The goal is peace of mind knowing that you’re covered. Most of the law is reactionary. That means it doesn’t come into play until there is a problem. However, knowing what problems could exist can help prevent them from ever existing.
Becker explained the four steps and noted that for new gym owners, the cost is less than $1,000. And for gyms that have partners, it’s up to $1,500.
1. File the Necessary Paperwork to Become an LLC.
While some gyms do become corporations, the great majority become LLCs (limited liability companies).
Becoming an LLC protects you personally from business-related liabilities. In addition, the record-keeping rules are more lax than with corporations. Plus, you can decide how you’re taxed for potential savings.
“Applying to become an LLC is fairly simple and most gym owners are able to navigate this step quite easily,” Becker said. It can be done online and the process is fairly straightforward. It will also lead you to acquiring a FEIN (Federal Employee Identification Number), which is required for tax purposes.
2. Set Up a Corporate Bank Account.
This is the step that most gym owners get right, Becker explained. It’s as simple as going to any bank and opening a corporate account. The goal is to funnel all revenue in a separate place from your personal finances.
Steps one and two are fairly intuitive for entrepreneurs when opening a gym. On the other hand, despite being equally as important, the following two steps are often overlooked.
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3. Draft an Operating Agreement.
Becker explained that an operating agreement is critical so that your business becomes a separate entity from your personal assets.
“The whole reason we’re creating a legal entity here is to protect the individual owner - or owners’ - personal assets from legal problems,” he said. “And so, if we then don’t create the legal documents, then there’s a question as to whether or not these legal entities entered into an agreement with the individual owners to provide them with that protection.”
Becker added that having these documents personally protects you from things like bankruptcy or lawsuits. Essentially, you want your house or your personal bank accounts “shielded from the liability,” he said.
Oftentimes, when a partnership is being formed, the need to draft an operating agreement seems more apparent. However, it’s often overlooked by solo gym owners when they’re the only shareholder.
“Nine times out of ten, they either don’t know they need to do it,” said Becker. “Or in the instance of the operating agreements, or the legal agreements, they don’t understand that it’s necessary if they actually want to enjoy the legal protections (of having) a legal entity.”
4. File for a DBA.
DBA stands for “Doing Business As” and it’s the name that your clients will know you as. Sometimes it’s the same as your legal business name but other times, that’s not the case.
For example, your legal business name might be Bionic Fitness LLC, but you’re operating as Bionic Fitness. Yes, you read that right. Even if the only difference between your legal name and operational name is the LLC, it’s still important to file for a DBA.
Essentially, your DBA connects your branded name to your legal entity, “so the world knows you’re one and the same,” Becker said. If not, you’re basically operating as a sole individual “under an unfiled, fictitious name.” And this leaves you personally liable.
On the surface, it might not seem to be a critical step when you’re opening a gym. But failing to file for a DBA can have the same consequences as skipping the operating agreement detailed above.
Becker pointed out that legally, it can expose you to all kinds of problems. Because without a DBA in place, people can sue you personally if there’s no recognized connection between your LLC and the name you operate under.
“All this stuff is connected and if you miss one step, you’re leaving yourself exposed,” Becker said. “If you don’t go through those processes, then you run the risk that it’s going to be easy to say, ‘Well, this legal entity isn’t legit, and so therefore it’s not going to provide the legal protection.’”
One More Look at the Costs.
According to Becker, Step 1 (filing for an LLC) costs in the neighborhood of $100 to $200, depending on the state. Step 2 (opening a bank account) likely won’t cost you anything.
If you work with Gym Lawyers, Step 3 (drafting an operating agreement) starts at $400 for solo gym owners. If you have partners or other shareholders, that fee does increase based on the complexity of the document.
Finally, Step 4 (filing for a DBA) costs anywhere from $25 to $100, depending on the state. Hiring Gym Lawyers to let the professionals walk you through the process will only add an additional $150 to $200.
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In Summary: Take the Necessary Legal Steps to Protect Yourself When Opening a Gym
When you’re first opening a gym, it can seem like there’s an almost never-ending list of things to think about. From equipment to marketing, you can handle certain tasks yourself. However, others should be accomplished with the help of a professional, and legal definitely falls into that category.
Take the four necessary steps to protect your gym and set yourself up for success. First, file the necessary paperwork to become an LLC. Then, open a business bank account. Next, draft an operating agreement. And finally, file for a DBA.
“I get that spending four-hundred dollars on an operating agreement is not a sexy thing to do,” said Becker. “But when you build a three-hundred thousand dollar gym, are you going to hang it on a four-hundred dollar operating agreement?”
He added, “What I really try to stress with gym owners is the understanding that missing one step in the process can really expose you to everything that we’re trying to avoid. That’s the whole reason we do any of this, is to protect the individual owner from liability.”