Subchapter S Corporation vs Limited Liability Company (LLC)

Subject: question about legal structure

Hi,

My sister and I are planning to open a gymnastics academy. My grandfather is trying to get a mortgage on the property and funding for the start up of our business. I am wondering how this effects our legal structure. We will either be an S Corp or LLC ( most likely S Corp). I guess what I am asking is how will the mortgage and loan he gets us effect our business legally. Are they all tied in or is it a separate issue?

Thanks,

L

PLEASE NOTE: None of the below is intended to be or should be construed to be professional legal or accounting advice.

While we can give you the benefit of our experience in the gymnastics industry and starting gymnastics businesses, we strongly recommend that you get both legal and accounting advice that will be specific to your state and situation. In general, in a gymnastics company, the actual gymnastics incorporation almost always should be a Subchapter S Corporation for the liability protection. If there is property involved, a separate LLC corporation to own the land and building is often a wise tax strategy.

S-Corp Because of Liability

In regards to S-Corp vs. LLC, it is generally accepted that an S-Corp which has a longer, wider and more varied history of legal precedent. That means that any legal decisions can be more easily anticipated. There is considerably less precedent for LLC’s which makes them legally less predictable. The S-Corp is certainly, by far, the preferred method of legal structure for gymnastics organizations for the legal predictability, liability protection and single taxation.

Many States Make It Easy to Incorporate

Gymnastics gym owners may often find it is not necessary to hire a lawyer to incorporate (or form an LLC), because the Secretary of State in the state will likely have a web site with all of the required forms and sample articles of Incorporation and even the required Bylaws. But in this situation, you will certainly want legal advice on how much and what kind of stock each of the participants will own and the whole legal relationship.

An S-Corp and an LLC?

There are some definite tax advantages to having a separate corporation (for this we use an LLC) to own the land and building and lease the facility to the gymnastics Subchapter-S corporation. Be sure to consult an accountant about how to handle this and get the latest accounting professional advice.

Always Get a Lawyer If You Have Partners

You will definitely want to hire a lawyer to sort out the legal and contractual relationships between you and your grandfather, especially if you opt for a legal structure with both an LLC and a Subchapter-S corporation.

Silent Partner?

The primary factor in the legal relationship is likely going to whether your grandfather is getting a personal loan, which he could then loan, to your corporation(s). Or whether he will be, in effect co-signing a loan for your (corporations) or if he is going to be an active participant as an officer of the corporation(s).

Fiscal Flexibility

Your grandfather could own the LLC (with or without you being a partner in it) and lease to your gymnastics corporation, which you would wholly own. Or both of you could own a percentage of each corporation.

True 50-50 Rarely a Good Idea

There is also the question of how much and what kind of stock you and your sister are going to each have (and your grandfather, depending on the arrangement) in the gymnastics and/or the land and building LLC. We find that it is generally unwise to have 50 – 50 stock situations as this can deadlock you and the organization if the partners disagree. There should likely be very explicit buy-out provisions so you could eventually buy out your grandfather’s interest in the business(es).

Hate to Say It But You Need a Lawyer

Our recommendation would be that both you and your grandfather have lawyers to work out the contract(s) between you. This will ensure that both your interests are adequately represented and to prevent any future misunderstandings. The arrangement between you and your grandfather can have any number of legal and financial implications which lawyers are experienced at predicting and including contingencies for all of them.

Pay Now or Pay Later

You will find that it is often less expensive to pay for legal advice in the beginning of any legal and financial arrangement rather than at a later date. In terms of family, it is also wise to have firm legal and financial understandings before an undertaking like this.

PLEASE NOTE: None of the above is intended to be or should be construed to be professional legal or accounting advice.

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