The topic of business set-ups and structures is an often misunderstood and under-rated part of any business owners journey when it comes to not only helping ensure your businesses success, but protecting it from potential liabilities that may arise along the way.
Having set up numerous gyms over the years, this is something that I have experienced in terms of how the right structure can influence your business both positively and negatively if not done the right way for you. Every other week you hear of gym’s shutting up shop for good when much of the time if your legal set up is done correctly, you can avoid the very worst case of scenarios.
Remember business can go up and down and as you grow there is much more to lose if things go pear shape. Conversely if you are in a position when you have grown your gym to sell it, the proper structure can decrease tax payable and result with more money in your back pocket at the end of the sale process.
Having consulted with numerous gym owners over the last several years, it is an area that within the fitness industry is often neglected or misunderstood due to lack of education and bad advice from incompetent accountants and lawyers. In my Building the Ultimate Fitness Business seminar and Intensive Business Development program, this is something that I discuss more at length.
So the big question… Should you set your business up as a sole trader, company, trust or a combination of them all?
Well before we get into that side of things first we need to break down some specifics in relation to the different options you have as either a start-up or existing gym business. Firstly, there are four basic structures we can choose from:
1. Sole trader
4. Trusts (3 types)
Let’s start from top to bottom…
1. Sole Trader
This is where most personal trainers and fitness professionals start, as solo operators and as such is the most common legal structure for most fitness professionals. The benefits of this model are that out of all of them it is the cheapest to set up and in Australia you are required to have a TFN and ABN under this set up.
Pros for this model are that as the sole trader, you keep 100% of the profit which is always a plus! There are also less compliance and legal requirements as opposed to the other models.
Cons for this model are that with it, you have unlimited personal liability. So, there is no barrier between you and any assets you may have. So, if your business has bad days, you run the risk of having potentially your car, house, jewelry etc. exposed to creditors or litigation.
A partnership is when the business is owned by two or more partners and can often have employees. This is the most common set up for many husband and wife business duos as the income is distributed evenly which can reduce tax, due to the total net income being split, the income tax bracket will not be as high for both parties, whereas with the sole trader you do not have the flexibility.
Apart from the above, other pros to this model are that the risk is shared evenly between the partners, which can make it easier to raise capital for your business venture rather than just going it alone. Another benefit is that the business itself does not pay any income tax, however the individuals do based of their income derived from the business.
Cons are that with shared responsibility comes shared liability, so liability is spread evenly amongst the partners. It is also important that let’s say there are multiple partners, you should ensure that documents are drawn up that would exclude others if one partner did the wrong thing.
The other con in this model is that if you have any employees, plant equipment etc they are generally all owned by the partnership. So, in the event of an employee dispute or potential client issue, (Say for example a client trips and falls using your gym equipment) all the partners are guarantors to the business, meaning your assets are up for grabs in a worst-case scenario.
I also recommend that in this type of set up, you ensure very clear contracts are drawn up along with job descriptions and performance metrics for each partner, so that everything is clear and in the open regarding expectations from both sides to avoid potential conflict or feelings of the other partly not pulling enough weight!
In summary with this model, whilst I am not opposed to it, if you are opening a fixed business site with employees (Gym, office suites etc) I would not use it, as it does not provide enough personal asset protection and taxation loop holes as the next option which is a company.
A company is a registered legal entity and is regulated by ASIC. A company has its own TFN and lodges its own tax. Generally, you can tell a company by the prefix at the end which depending on the country would be PL, Pty Ltd, or Pty Lte.
It comprises of directors, secretaries and shareholders and is the most common form of business set up for most gym owners I come across. Directors of the company are paid a salary, anything outside of that is considered a loan from the company. Dividends are generally paid out at the EOFY based on the net profit of the company after paying out your salary and other business expenses.
In smaller businesses, you may only have one director, in larger organisations you can have multiple directors with one person assuming the role of managing director or chairman, whom has the final say.
Some key pros to the company set up are the following:
1. If your business has a gross revenue of less than $2,000,000 your tax rate is 27.5%, if it is over that amount it bumps up to 30%.
2. It provides superior personal liability, so your liability is limited to the company’s assets and not your own. For example, creditors cannot go after shareholders beyond the amount they contributed to the start-up of the business. So, your house, cars, jewellery etc as a rule of thumb are going to be safer in this model.
3. Company’s by their very nature, will generally have a greater access to capital raising.
4. Ownership is easily transferred via a simple share transfer. This is done based on the company’s valuation but it is a far easier process than in the previous two models.
5. As your business grows you can set up other companies that work within your ‘group’ structure to further decrease potential liability’s. For example, payroll entities and plant equipment companies, which can then license the use of staff and/or any company assets of value to the company that operates the business. This type of set up can also have various tax benefits between the friendly corporate entities.
So, what are the cons? The main things to look at are:
1. The company is by law, required to publicly disclose key information to ASIC, so if you like your own personal privacy it goes out the window here.
2. Companies must maintain meticulous book keeping and records, with ATO audits this is paramount.
3. Directors can be asked to give personal guarantees to any debts incurred, such as PAYG or SGC amounts to the ATO and can face massive fines in the event the company does not meet its legal financial requirements. Although in saying that, generally the amount will need to be more than 7 figures to go that far.
I personally prefer this model for most fitness professionals, whether they are operating out of a commercial gym or own their own fixed site. I for example used it when I was running a dozen trainers through Fitness First and Anytime Fitness from 2011-2012 before I opened up my first fixed gym site.
Now when owning your own gym or clinic, this set up allows you to maximise your own personal asset protection along with the company’s if you set it up right, along with giving you greater tax breaks that if you were operating under the first two models.
I personally recommend as a bare minimum if you own a fixed site, set up two companies, one which owns everything of value – so think plant equipment, furniture, business IP and internal systems etc – and one that operates the actual business. Get a license agreement drawn up between both businesses which sees the IP/holdings company license the above items to the operating business which holds the contracts with staff, clients etc. This will create legal separation between the assets and the business and limit your litigation risk.
4. Trust (3 types)
The final type of set up is the trust format of which there are three types. As a rule of thumb, a trust is the number one legal structure you can use to ensure the highest level of asset protection in your business. Some key points when it comes to trusts are the following:
1. A trust is governed by what is known as a trust deed, which outlines the rules of the trust.
2. In a trust deed, you will have a few key roles, one is the appointor who settles the trust deed, usually your accountant or lawyer. The other is the trustee itself, so the person or company that owns the assets of the trust, so if you used the company example this person would be akin to the managing director or CEO, so they call the shots. The final key person is the beneficiary, so the person whom benefits financially from the trust. Beneficiaries entitlements are generally like those of a shareholder in a company.
The most common trust structure which is known as a discretionary trust otherwise known as a ‘family’ trust. In this set up the trustee (Usually a parent) decides how the money within the trust gets moved around. A trustee can be either an individual or a company. The beneficiaries in this set up are usually the children, but will also be the parents. Under this set up you can gift ‘x’ amount of money to beneficiaries, allowing you to mitigate tax better than under a traditional company set up.
You can also have a corporate trustee under a family trust, so a company is placed as the trustee rather than an individual, which again gives another layer of protection as that company will have a director or directors which is usually you and/or family members.
The second most common type of trust is known as a unit trust, which is most commonly used in business and when people want to do joint ventures. In this case, the beneficiaries have a defined entitlement under the trust, like that of a shareholder.
The third most common type of trust is known as a hybrid trust, which is generally a unit trusts with discretionary distribution options fixed by the trust deed. E.g.; x amount must go to xyz per annum.
Now although more complicated than the previous three, there are some serious pros when it comes to this set up:
1. Overriding benefits with trusts is that you can mitigate tax when all its income is distributed to its beneficiaries. For example, you can give income to people whose income tax brackets are not high, thus mitigating tax payable to the ATO.
2. You can move properties, company’s etc into trusts, giving you another layer of asset protection.
3. Like with companies, it can be easier to raise capital.
Now the cons? Well there are a few…
1. They are expensive to set up and maintain. In Australia, you are usually going to pay between $2000-$5000 to set one up depending on the type and scope of the trust deed.
2. They are defined by the scope of the trust deed, think of it as like a 10 commandments document for the trust. So, anything on it must be abided to.
3. Finally, with unit trusts, sale of units can attract stamp duty, unless given as a donation which can affect your bottom line when looking at potentially getting investors into your business.
In summary, the main benefit with trusts is to provide maximum asset protection and tax benefits. So, for example you will have a company operating out of a unit trust that is owned by a discretionary trust. So, you can be far more creative with your corporate structures when you have a big business.
Personally, I don’t recommend this type of set up unless you have a seven-figure business, as the set-up costs, ongoing accounting fees etc. are quite high, so unless you are earning a ton of money it can cut into your P & L on a smaller scale business.
Over the years, I have tried all the models mentioned and today I solely use company and trust set ups for my various businesses so that I can not only better protect my family’s financial security, but also minimise tax payable, especially in Australia which has one of the highest taxation brackets in the western world.
In closing, it can often be confusing when it comes to matters of legal structures for fitness professionals and personal trainers. After all we generally just get into the industry because we enjoy living a healthy life ourselves and want to help others.
However, the reality is if you don’t set up the fundamentals of your business properly you run the risk of selling yourself short when it comes to getting a financial return from your passion but also protecting yourself from worst case scenarios in the event they rise along your business journey!
Yours in success,