Selecting whether you’re going to organize your business into an S-Corporation, a C-Corporation, or an LLC (Limited Liability Company) is another big decision you’re going to have to make before you open your gym doors.
And if you’re like many gym owners, you likely don’t have a financial or taxation or background, let alone an understanding of which option will benefit a small gym business most. So here’s a brief outline of the various options, as well as information from gym owners about what’s best for a gym business specifically:
A C-Corp is the most common type of business in the USA. It’s a separate legal entity that essentially protects the owner’s personal assets (i.e. limited liability). All corporations start out as being C-Corporations.
In the case of a C-Corp, the organization/company gets taxed on income at the corporate level, not the owner personally. Whatever 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.
Some general advantages to being a C-Corp include:
- Limited liability for the owner (the owner’s personal assets are produced if something goes sideways with the company
- Unlimited growth potential and the ability to sell equity to raise money
- No limits on the number of shareholders (this is likely irrelevant for a small business like a gym, who is unlikely to ever have hundreds of shareholders)
- Various tax deductions
- Allowed to divide up voting rights (meaning voting rights don’t need to be equal among shareholders. Again, it is unlikely to be relevant to a small gym business owner)
Some of the potential downsides to being a C-Corp include:
- Owners seeking to be paid dividends—which is almost always the case for a small business owner, who generally needs to take a salary from the business—will pay more in taxes because you’re taxed at both the corporate and personal level
- There are more expenses in being a C-Corp than if you’re an LLC
- More regulation than both S-Corps and LLCs
In general, C-Corps are more beneficial for start-up companies or tech companies looking for funding or for any company who plans to become an IPO one day.
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, your business’ profits and losses get passed through the corporation onto the owner, which you report only on your personal tax return. This means you only pay taxes once, not twice, such as is the case with an C-Corp.
Some advantages to being an 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
- You can 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
Some of the potential challenges to being an S-Corp include:
- You have to be an American citizen (and so do all shareholders)
- There’s 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 S-Corps are that each state has different laws, and some states don’t even recognize S-Corp status, meaning 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 only owner, as is the case for many gyms, you report your income and expenses 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.
Though this might sound just like an S-Corp, it’s not. If you’re an LLC, you get taxed slightly different than an S-Corp when it comes to employment taxes. HOWEVER, this doesn’t have to be the case: You also have the option if you’re an LLC to be taxed as if you were either a C-Corp OR an S-Corp.
Speaking with gym owners, it seems like the overwhelmingly popular option is to organize as an LLC but get taxed like an S-Corp.
However, if you eventually become a gym owner with multiple locations, and have numerous partners, then the trend is to both organize and file taxes as an S-Corp. This, however, is less common, as most gym owners own just one location (especially if you’re just starting out).
One other great thing, gym owners say about being an LLC is that it allows them to hold their partners accountable to their roles and responsibilities agreed to in their operating agreement, where as they can’t be held accountable in the same way in an S-Corp.
The biggest three reasons being most gyms choose to be LLCs and file as S-Corps include:
- You pay less taxes
- Limited liability for the gym owner (his personal assets are protected if the business goes under)
- The filing fee is lower when you’re an LLC (However, these fees differ state-by-state).
That being said, a minority of gyms do choose to be C-Corps. Three reasons include:
- 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, then you can actually avoid the double taxation problem
Another gym owner explained he chose to be a C-Corp because he was able to roll his personal 401K into the C-Corp, and 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 decision to become a C-Corp, an LLC or an S-Corp comes down to your own personal situation, and there’s likely an argument for each depending on your circumstance. We recommend speaking with other experienced gym owners and a tax professional before finalizing your business.
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