In our post, Wodstar’s Tribute To Box Owners, we talk about the great respect we have for entrepreneurs looking to realize their dream and that we want to help them traverse those serpentine paths.
To that end, Wodstar’s Legal Star, Robert Reder, Managing Partner of Blythe Grace PLLC, presents an ongoing series for potential Box Owners surrounding legal and business issues related to starting and running your CrossFit Box.
In our first post of the series, Starting a Box? Legal & Business Issues to Consider: Choosing Your Name, we advised on selecting a name and what to do next. In this post, we review various business structures, as your structure can have important liability and tax consequences.
Sole Proprietorship: A sole proprietorship is a one-person business that is not registered with a state. You do not have to file any paperwork to set up a sole proprietorship. Instead, you create a sole proprietorship simply by going into business for yourself. Legally, a sole proprietorship is inseparable from its owner; the business and the owner are one and the same. This means that the owner of the business reports business income and losses on his or her personal tax return and is personally liable for any business-related obligations, such as debts or court judgments.
Partnership: A partnership is a business owned by two or more people. Like a sole proprietorship, you do not have to file any paperwork to form a partnership; the arrangement begins as soon as you start a business with another person. The partnership’s owners pay taxes on their shares of the business income on their personal tax returns and they are each personally liable for the entire amount of any business debts and claims. Sole proprietorships and partnerships make sense in a business where personal liability is not an issue. (*i.e.*, a small service business in which you are unlikely to be sued and for which you will not be borrowing money for inventory or other costs).
Limited Partnership: Limited partnerships are costly and complicated to set up and run, and are not recommended for the average small business owner. Limited partnerships are usually created by one person or company (the “general partner”), who solicits investments from others (the “limited partners”). The general partner controls the limited partnership’s day-to-day operations and is personally liable for business debts (unless the general partner is a corporation or an LLC). Limited partners have minimal control over daily business decisions or operations and, in return, they are not personally liable for business debts or claims.
Limited Liability Company: A limited liability company (LLC) is a flexible form of enterprise that blends elements of a partnership and other corporate structures. An LLC is not a corporation; it is a corporate form that provides limited liability to its owners in most states. In some states, businesses that provide professional services requiring a state professional license, such as legal or medical services, may not be allowed to form an LLC but are required to form a very similar entity called a Professional Limited Liability Company (PLLC). Typically, an LLC member’s liability is limited to his or her capital contributions to the LLC, unless the LLC has an operating agreement that says differently. In addition, an LLC is taxed separately from the individual members. LLCs are cheap to set up and require very little corporate formalities, although an operating agreement is recommended.
Corporation: A corporation is a separate legal entity that has been incorporated either directly through legislation or through a registration process established by law. Incorporated entities have legal rights and liabilities that are distinct from their shareholders. Most states allow the creation of new corporations through registration. Registered corporations are owned by shareholders whose liability is limited to their investment. Shareholders do not typically manage a corporation; shareholders instead elect or appoint a board of directors to control the corporation in a fiduciary capacity. Interestingly, corporations are legal persons and have many of the same rights as people do.
Practical advice: Most owners of a CrossFit box should consider the LLC as the appropriate business form. An LLC limits the liability of its members in most circumstances, is cheap to set up, and requires very few corporate formalities, although an operating agreement is recommended.
For questions regarding this article, or any information presented, please contact:
Robert S. Reder
Blythe Grace PLLC
6350 East Thomas Road, Suite 330
Scottsdale, Arizona 85251
Office: (480) 663-8838
Fax: (480) 429-3679
The information contained in this blog is intended to be informational only and does not establish an attorney/client relationship, nor is it meant to be legal advice for a specific matter. Please contact Robert S. Reder for any questions you have concerning the informational material contained herein.
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