By J. DeVoy
Much of my non-working time since the beginning of 2012 has been spent inside of a gym. While it’s not as social as joining the board of a non-profit, it’s not a bad place to meet small business owners, other lawyers, and even Ice T (provided you join the right gym, and not a wasteland that prohibits effective exercises). At a decent gym, the vast majority of people either know what they’re doing, or are using the services of a decent personal trainer, who often has a separate arrangement with the gym. However, when injuries do arise – and more along the lines of ow-my-rotator-cuff-is-busted-after-seven-years-of-pain than the severed finger variety – it’s clear where the trainee and well-resourced gym stand, but there’s some question of what the relatively smaller individual trainer can do. In fact, in many of these situations, the trainer may be the economically smallest person in the equation, trapped between an injured high net worth individual (or his/her spouse) and a facility with considerable income streams and assets.
One option is to organize a limited-liability company and offer services through it, and keep all assets associated with training within the company. This would include inflows from clients and outflows for gym memberships, advertising, and work-related equipment, such as sneakers. While setting up a separate entity may create more paper work, it should make accounting and claiming deductions easier at tax time. It can even have favorable tax treatment for health care premium payments, provided the S-Corporation election form is filed with the IRS and all requirements are met.
In Nevada, though, the strongest protection may come from NRS 86.401, defining the rights and remedies of a creditor of a LLC’s members. Under that section, the only remedy a creditor has against an individual debtor’s ownership interest in his or her LLC is a charge on the member’s ownership interest – giving the creditor only the rights of an assignee. NRS 86.401(2) goes on to prohibit the creditor with a charge on the debtor LLC member’s ownership interest from foreclosing on the debtor’s interest, and eliminates any other remedy other than the charge described in NRS 86.401(1). However, these protections can inadvertently be contracted away. See NRS 84.401(2)(c).
What does this practically mean? If I’m a trainer and a former client sues me personally, even if the former client wins, he or she cannot touch the money I have in my LLC unless it flows out as a distribution to owners. This is different from a salary, or even bonus, that the LLC could (and in that situation, would) pay to me as wages in that situation. Simultaneously, if my LLC is sued but not me personally, it will be very difficult to enforce the judgment against the LLC against me because of Nevada’s robust protections of the corporate form and general unwillingness to pierce the corporate veil (although this is not absolute). Now, if both my LLC and I were sued… well, that’s what discovery is for, but it seems like one of the scenarios above would be the most likely outcomes. If the company and individual are properly sued, then that’s an interesting asset protection scenario that I’m not willing to consider for free.
Of course, norms within the fitness community and culture may frown on this use of the corporate form for protection. I’ve personally never seen a lawsuit filed against a personal trainer. But, if financial defense against a malicious former client costs only a few hundred bucks – especially if operating without indemnification from an insurer or gym – it may not be a bad idea.