Many new health and wellness coaches and other start-ups wrestle with the decision of whether to create a legal entity.  With the advent of virtual platforms or telehealth technology, starting a wellness coaching or virtual health business is gaining traction. I have had many clients seeking health coaching lawyers ask me should I even bother?  The basis for this question is that when you venture out on your own, you become a “sole proprietor” unless you actively register your business with a State, such as your own state or another state like Delaware.  So, the default legal status of any new business is sole proprietor, or partnership if you decide to enter a partnership agreement with someone.

The pros and cons of creating a legal entity or just using the default “sole proprietor” status are as follows:

Table 1

Pros and Cons of Having Legal Status of Sole Proprietorship[1]

Pros Cons
No required state paperwork for the business[2] You can be sued personally for your business activities, putting your personal assets at risk
No annual state filings[3] Investors don’t like investing in sole proprietorships
Profits/losses pass through to owner’s personal tax return (therefore no business or unemployment taxes) It’s hard to obtain business loans and credit; instead you may get and use “personal loans” or credit.
Can deduct use of personal items for business purposes from personal income tax, as well as other business expenses You may have lower market credibility because you do not operate under a trade name (but you can register a “Doing Business

As” name with your state department of revenue or Secretary of State, which requires initial and ongoing fees).

 

As you can surmise from Table 1, most sole proprietors use their own name as the name of their business. You don’t have to, but then you must register your “Doing Business As” name with the state, which defeats one of the benefits of sole proprietorships (not having to file anything with the State).

What about Naming Your Start-Up Business?

Another question many start-up businesses, such as health and wellness coaches, struggle with is naming their company.  Should they use their own name, or create a new name for their business? The answer depends, of course. It will depend on the uniqueness of your name and whether you want your name perpetually associated with your business. Think of fashion businesses who started out with their founder’s name. Long after the founder is gone, the business lives on, as does their name. Some people might like that idea, others may not. One should think about the consequences to your heirs by having them associated with a famous name. This of course assumes you have grand ideas for your business.  If you see your business lasting as long as you and generating enough income to pay your bills and enjoy your life, rather than becoming a mega corporation, then you have less to consider as far as long term consequences. Nevertheless, using your own name for your business may create additional overlap between  your personal life and your business life, which you may not want.

If using your own name as your business or exposing your personal assets to potential risk does not appeal to you, then creating a separate legal entity is probably a good idea.  If you decide to create a separate legal entity, then you must choose which type of legal entity.  There are several from which to choose.  The most common types are C Corporations, S Corporations, and Limited Liability Corporations.  Table 2 compares the pros and cons of incorporating into one of these legal entities compared with using a sole proprietorship.

Table 2

Pros and Cons of Incorporating Your Business (as Opposed to Having a Sole Proprietorship)[4]

Pros Cons
More market credibility Must file initial documents with the State to register
You are not personally liable for debts or lawsuits against the company Must file annual documents and pay annual fees
Easier to get financing from lenders and investors May pay more in taxes (such as business and unemployment taxes)
If you elect LLC status, you can be taxed as a sole proprietor and can deduct business expenses from your individual tax return Tax return fees may be higher than completing an individual tax return

 

Which Legal Entity Should I Choose?

If you decide to create a separate legal entity, the next question to consider is which type. There are many considerations when deciding legal entity type. One of these considerations include whether you plan to have investors. If you do, then you probably want to create a C-Corporation, as those entity types have the most appeal to investors. Other considerations include taxation issues. Some legal entities, such as LLCs and S-Corporations, are “pass-through” entities, which means any income generated by the company gets “passed” onto the owner.  The owner then reports that income on their personal tax return. In contrast, C-Corporations are taxed at the corporate tax rate. So any income earned by the C-Corporation is taxed, and then any money provided to the owner of the company in the way of income is taxed on the owner’s personal income tax return. In those cases, then, the owner is taxed twice. So, for smaller companies that don’t envision needing investors, a pass-through company may seem like a better deal. Regardless of your situation, it’s always a good idea to involve your legal partner in your decision making. The health and wellness lawyers at the Center for Health and Wellness Law can help.

How do I form my legal entity? 

As you may have guessed from the first part of this chapter, forming your legal entity requires filing forms with your state’s secretary of state, unless you plan to be a sole proprietor, in which case you do nothing but get to work.  Partnerships should have a written partnership agreement, but do not need to file anything with the secretary of state.  Note:  your state may not call the agency in charge of corporate filings the “secretary of state.”  Case in point: the agency in charge of corporate filings and records in my home state of Wisconsin is called the Department of Financial Institutions.  A good resource to get you started with finding your state agency can be found at https://www.nolo.com/legal-encyclopedia/form-llc-in-your-state-31019.html.  It is typical for the same state agency to be in charge of all types of corporate entities.

Conclusion

This blog post just scratches the surface when it comes to legal entity formation. You must also consider where to register your company, obtaining a Tax ID number, insurance, state restrictions on entity type (especially for licensed professionals) and other issues. The good news is that you don’t need to make these decisions alone. There are resources that can help. I wrote a book on entrepreneurship considerations, including for health and wellness start-ups such as health and wellness coaches. You can order your copy of The Tug:  Finding Purpose and Joy through Entrepreneurship here.  There you will find additional information and considerations for your new venture. You can also contact my law firm, the Center for Health and Wellness Law, LLC. Our health and wellness attorneys are ready to help!

[1] These pros and cons are courtesy of John Tucker, LLC v. Sole Proprietor:  How to Make the Right Choice for Your Business (Dec. 3, 2019), available at https://www.nav.com/blog/llc-sole-proprietor-18376/#:~:text=One%20of%20the%20key%20benefits,debts%20incurred%20by%20the%20business. (last visited June 14, 2020).

[2] This assumes the business owner doesn’t need any industry-specific licenses, such as a law or health care license, in which case the owner would need to complete that paperwork.

[3] See above footnote.

[4] These pros and cons are courtesy of John Tucker, LLC v. Sole Proprietor:  How to Make the Right Choice for Your Business (Dec. 3, 2019), available at https://www.nav.com/blog/llc-sole-proprietor-18376/#:~:text=One%20of%20the%20key%20benefits,debts%20incurred%20by%20the%20business. (last visited June 14, 2020).

The post Legal Entity Formation Considerations for Health & Wellness Coaches first appeared on Health,Corporate,Wellness Vendors and Lifestyle Coach.