Legal Structure of a Fitness Center Limited Partnership

Why a Gym Fits a Market Need

There are some interesting dynamics at work in determining the feasibility of creating any new enterprise in the current economic climate, but these issues are particularly pronounced as they relate to the establishment of a public gymnasium or other fitness-related business. On the one hand, fitness awareness has significantly increased across the American demographic; on the other hand, the nation is faced with a virtual epidemic of obesity due in large part to the increasingly sedentary lifestyle that characterizes modern society. Despite these constraints, it is apparent that numerous well-operated fitness facilities enjoy healthy profits, making the creation of such a facility a timely and relevant enterprise.

The purpose of this paper is to provide a review of the relevant literature to identify and describe the legal structure of a gymnasium and some of the typical contractual arrangements encountered during its establishment and as part of its day-to-day operation. An analysis of pertinent issues relating to the type of facility involved and the corresponding management and marketing concerns is followed by a background of the activities involved in a typical gymnasium operated as a limited partnership and a proposed business model for the partnership. A discussion of the various legal issues and documentary requirements involved in creating and operating a limited partnership is followed by a recommendation concerning how the enterprise should proceed and a summary of the research in the conclusion.

Gymnasiums (hereinafter alternatively "gyms," "fitness centers," or "fitness facilities") serve a wide range of needs in contemporary American society, ranging from meeting purely physical fitness-related needs to those more related to socialization and, by extension, romance and dating (Cruz-George, 2007). Therefore, the type of gym structure used and the specific corresponding legal factors involved will depend on the market being targeted. For example, gymnasiums providing services for single-sex gym classes in a private school setting will have very different legal considerations than a public co-ed facility targeting young, unmarried, and affluent members of the community.

Targeting this segment of the demographic would appear to be a good place to start for a new enterprise. For instance, Mealey (1997) examined the reasons why most people sought out a public gymnasium and the types of exercise equipment they used during their visits, finding some interesting relationships between the two variables. The gym clientele found to be more interested in establishing relationships used exercise equipment that maximized their opportunities for communication with members of the opposite sex as well as equipment that accentuated the physical attributes the respondents believed were most attractive (Mealey, 1997). According to Mealey, "Many men and women who use athletic training equipment do so in an attempt to increase their physical attractiveness to potential mating partners and thus use athletic equipment in ways that would exaggerate physical, biological gender signals" (Mealey, 1997, p. 224).

These behaviors extended even to more recent innovations in physical fitness training equipment specifically intended to reduce gender-related disparities. Mealey notes that "Men tailored their workouts in ways that would enhance the musculature of the upper body, and women tailored their workouts in ways that would enhance leg and hip muscle" (p. 224). These findings held consistent across three independent samples analyzed for both males and females, but were most pronounced among younger, college-aged samples who reported that "appearance to opposite sex was one of the most important reasons for working out" (quoted in Mealey, 1997, p. 224). Therefore, the age and gender composition of the market being targeted will influence what type of physical fitness equipment is used and what training regimens will be offered. In addition, the levels of privacy a gym offers will directly relate to what type of market is being targeted.

Background and Business Model

With a history dating to the ancient Greeks, who used such facilities for socialization as well as physical fitness activities, gymnasia have served as meeting places and exercise venues for humankind for thousands of years (Rahe, 1993). While the basic purposes of gyms have not changed much since ancient times, the equipment and methods used have changed in fundamental ways. Although most gyms today offer a variety of exercise equipment and classes, a weight room, a locker room, and qualified trainers, they differ considerably depending on these factors and how they relate to the fitness goals of existing and potential clientele.

There are also environmental issues such as temperature and noise levels that must be taken into consideration when operating a public gymnasium. According to West (2006), "The temperature should be what is comfortable for your clients. It will be different for each of your classes. I suggest that the issue be resolved at the management level since they will be responsible for the overheated client in a room that is set too warm for regular aerobics classes. I consider 70 degrees too high for regular aerobic classes. It would probably be fine for the over-60 crowd. For an aerobics class, a room temperature of no higher than 68 degrees and 50% humidity is recommended" (p. 17). Gym operators who are uncertain about optimum temperature levels should consult their clientele as well as the relevant Occupational Safety and Health Administration (OSHA) guidelines, which recommend a workplace temperature range of 68–76 degrees Fahrenheit and humidity control in the range of 20%–60%, with corresponding allowable noise ranges depending on the activities involved (West, 2006). Some upscale gym operators have even recruited feng shui experts to help provide an atmosphere conducive to promoting harmonious environmental conditions for their clients (Wu, 2005). The private gym enterprise targeting middle-class young adults discussed herein, though, will not require a feng shui expert; it will require a viable business model that can guide its activities in the short term and provide the basis for growth in the long term.

Business Model

The business model for this private gym enterprise will be based on providing physical fitness activities and equipment usable by young adults with or without children by offering a family-friendly environment that features on-site childcare. The model calls for the company's clientele to receive a personalized training regimen and individual attention from the training staff so that members can pursue their physical fitness goals effectively. The private gym will target members aged 45 years or under who have young children in the family. Initially, on-site childcare facilities operated by the gym will accommodate 25 children (including five infants), with plans to expand this service depending on demand. The combination of state-of-the-art exercise equipment, expert trainers, and on-site childcare will be the primary competitive advantage for this business. Initial staffing requirements and projected salary ranges for these positions are presented in Table 1 below.

Table 1: Staffing Requirements and Projected Salaries for a Private Gym

Personnel / 2010 / 2011 / 2012
Center Manager (general partner): $48,000 / $50,000 / $52,000
Assistant Manager (general partner): $36,000 / $38,000 / $40,000
Center Staff: $240,000 / $270,000 / $300,000
Childcare Manager (general partner): $30,000 / $32,000 / $34,000
Childcare Staff: $147,000 / $170,000 / $200,000
Tennis Manager: $30,000 / $32,000 / $34,000

Source: Workout Gym Business Plan for Mountain Brook Fitness Center (2007)

Mission Statement

The mission statement will be included as part of the partnership agreement (discussed further below) and will state: "It is the mission of Anyname Fitness Center, LP to provide high-quality physical fitness services in an affordable environment that is conducive to physical fitness activities using the best equipment and trainers available to grow the business for the mutual profitability of its general and limited partners and the physical fitness of the clientele it serves."

Legal Issues of a Limited Partnership

According to Black's Law Dictionary (1991), a limited partnership is a "type of partnership of one or more general partners who manage business and who are personally liable for partnership debts, and one or more limited partners, who contribute capital and share in profits but who take no part in running business and incur no liability with respect to partnership obligations beyond contribution" (p. 928). This definition is congruent with the provisions of the Uniform Limited Partnership Act, which stipulates that such a partnership is comprised of one or more general partners and one or more limited partners who are not bound by the obligations of the partnership (Black's, 1991). A limited partnership represents an effective operational structure for asset protection because limited partners are generally liable only for their partnership contributions and not for any partnership debts, as long as they do not participate in the control of day-to-day partnership business. By contrast, general partners control the partnership and are completely liable for partnership debts (Dedon, 1999).

Although laws concerning limited partnerships vary from state to state, the Uniform Limited Partnership Act sets forth general requirements for their creation and operation. For instance, in Texas, "The limited partnership operates in accordance with a partnership agreement, written or oral, of the partners as to the affairs of the limited partnership and the conduct of its business. While the partnership agreement is not filed for public record, the limited partnership must file a certificate of formation with the Texas Secretary of State" (Selecting a business structure, 2010, para. 2).

Ease of Formation

In Missouri, forming a limited partnership involves only the filing of a certificate of limited partnership with the state's Corporations Division and the payment of all required fees. However, there are a variety of other issues that must be considered during formation that will contribute to its success — or failure — in the future, and these issues are discussed further below.

Taxation

The ultimate goal of any limited partnership is to provide a framework in which there is limited personal liability as to taxation for all owners (Cleveland, Wells & Yoshimoto, 1996). According to Gutterman (1994), "For tax purposes, profits and losses from the limited partnership are 'passed through' to each of the general and limited partners in the proportions provided for in the limited partnership agreement" (p. 259). In this area, the general partners enjoy a great deal of latitude concerning the allocation of profits and losses. Gutterman advises, "As a general rule, the partners are free to allocate profits and losses in any manner they decide, even if the allocations are disproportionate to the capital contributed to the partnership, provided that the allocations have 'substantial economic effect' under Section 704(b) of the Internal Revenue Code of 1986, as amended" (1994, p. 259).

In addition, in cases where there are family relationships between the partners, such as a married couple, there are also worthwhile income and estate planning reasons why assets should be transferred to a family limited partnership:

1. It allows a couple to shift income to children or other relatives through gifts of limited partnership interests. Income from these limited partnership interests is then taxed to the limited partners. If the parents together own 10% of the partnership and the partnership's income is $100, the parents would be taxed on only $10 of income.

2. Once the interests have been given away, they generally no longer are included in the couple's gross estate.

3. Couples can take advantage of gift tax provisions by giving $20,000 worth of limited partnership interests each year to a limited partner. These independent reasons for forming a limited partnership may help demonstrate there is no fraudulent intent on asset transfers to the partnership if this strategy is subsequently challenged in court (Dedon, 1999, p. 61).

External Liability

According to Dedon (1999), partnerships are confronted with certain special risks that can doom a business to failure because partnerships are liable for potential claims against their partners. "General partners may be liable for claims against their personal assets resulting from engagements performed in distant cities of which he or she had no knowledge. Failure to adopt a plan that protects assets from creditors can have tragic consequences for those who are sued" (Dedon, 1999, p. 61).

There are some limits as to what and how much can be assessed against partnership assets. The same type of affirmative asset partitioning applied to corporations — typically termed "priority with liquidation protection" — is also used with limited partnerships. This assigns creditors a prior claim on assets and provides that if a partner becomes insolvent, the partner's personal creditors cannot force liquidation of partnership assets to satisfy their claims after exhausting the partner's personal assets (Hansmann & Kraakman, 2000). The most severe tactic a creditor can use in these cases is to have the partner's creditors assume the partner's role as an owner, which can encourage the liquidation of firm assets, but this requires at least a majority agreement among the partnership's limited partners (Hansmann & Kraakman, 2000).

Management and Control

The general partner of a limited partnership has full authority to manage the affairs of the limited partnership and is subject to unlimited liability for debts and obligations incurred by the limited partnership. Limited partners have no rights to participate in the management and control of the business; however, they also are not liable for any of the debts or obligations of the limited partnership in excess of the amount of capital they contributed to the partnership (Gutterman, 1994, p. 258). In practice, the management structure of a limited partnership ranges between fully and partially participatory (Cleveland, Wells & Yoshimoto, 1996).

Transferability and Continuity

Both partnerships and corporations share some common characteristics as they apply to transferability and continuity. Although partnerships and corporations must both have associates as well as a stated objective in order to conduct their businesses, partnerships do not typically possess four of the remaining characteristics that define corporations: (a) limited liability, (b) centralized management, (c) continuity of life, and (d) free transferability of interests (Cleveland et al., 1996). Current IRS regulations require that, in order to be properly formed for federal income tax purposes, a partnership is not permitted to possess more than two of these four corporate characteristics (Cleveland et al., 1996). Because limited liability is one of the primary features a limited partnership provides its stakeholders, companies seeking to operate as limited partnerships must ensure that they do not possess more than one of the other three remaining corporate characteristics: (a) continuity of life, (b) centralized management, or (c) free transferability of ownership (Cleveland et al., 1996).

Conclusion and Recommendations

Taken together, creating a limited partnership in the State of Missouri is fairly straightforward, but there are a number of issues that must be taken into account to ensure that all general and limited partners have their obligations spelled out and provisions made for eventualities that may not be readily apparent to eager partners wanting to get started right away. Therefore, the company should proceed carefully and thoughtfully, first by enlisting the assistance of a lawyer — either known to the partners or referred for this purpose. The lawyer can help draft the form of the limited partnership, prepare the requisite documents that must be filed with the Missouri Secretary of State, and provide timely advice concerning licensure requirements for the types of trainers being used and liability insurance requirements.

The review of the literature covered a number of pertinent points relating to the creation and operation of a public gymnasium as a limited partnership, including the respective roles, responsibilities, and liabilities of general and limited partners. Other points included the legal issues involved in creating and operating a limited partnership, the structure of the organization and its appropriateness for a fitness center, the ease with which such an entity can be formed, relevant taxation issues, and the external liability that applies to the two different types of partners. Finally, a general discussion of management and control, transfer and continuity considerations, and the legal structure of the limited partnership concluded the research.

References

Black's Law Dictionary. (1991). St. Paul, MN: West Publishing Co.

Choosing a gym. (2007). ABCs of Fitness.

Cleveland, G., Wells, W. R., & Yoshimoto, G. A. (1996). Is there a limited liability company in your future? Review of Business, 17(3), 26–27.

Cruz-George, C. (2007). Gym patrons balance physical, fiscal health in softer economy. Pacific Business News (Honolulu).

Dedon, J. (1999). Protecting personal assets: It's vital to safeguard personal property before problems occur. Journal of Accountancy, 172(1), 60–61.

Gutterman, A. S. (1994). Technology-driven corporate alliances: A legal guide for executives. Westport, CT: Quorum Books.

Gym temperature and noise levels. (2007). IFA Fitness.

Hansmann, H., & Kraakman, R. (2000). The essential role of organizational law. Yale Law Journal, 110(3), 381.

Mealey, L. (1997). Bulking up: The roles of sex and sexual orientation on attempts to manipulate physical attractiveness. The Journal of Sex Research, 34(2), 223.

Rahe, P. A. (1993, Winter). The martial republics of classical Greece. The Wilson Quarterly, 17(1), 59–60.

Selecting a business structure. (2010). Texas Secretary of State.

Starting a business. (2010). Missouri Secretary of State.

Truskowski, J. B., & Thorne-Thomsen, T. (1999). The importance of partnership agreements. Journal of Accountancy, 177(1), 92–93.

West, A. (2006, January 23). Shop around for the best deal in the gym world. Western Mail, 17.

Wu, N. (2005, January 7). Businesses buy into the art of placement. Pacific Business News (Honolulu).

Appendix A: Levels of Privacy and Fitness Goal Considerations in a Gym

1. Public Gym. This type of fitness gym is open to anyone who wants to use it. Usage is often available on a pay-as-you-go basis, or by the day or by the activity, at reasonable rates. A public gym generally offers a wide variety of programs for adults and children (e.g., gym and dance classes, summer camp for kids, outdoor programs); however, public facilities might not have as much equipment or as many weight-room attendants as a competitive private club. Also, while the equipment is properly maintained, there may be a long wait for a turn at a particular station.

2. Private Gym. Unlike public gyms, private gyms or health clubs are profit-making businesses. In fitness-in-demand communities, private health clubs are competitive with each other. A private gym is either independent or a franchise belonging to national, local, or regional chains. Due to competition, top private fitness centers offer a full array of classes (from weight training to yoga), on-site retail shops, massage and/or physical therapists, and perhaps even a restaurant that caters to healthy cuisine.

3. Very Private Gym. This often refers to the new generation of "miniclubs" sprouting in many areas. Most of the time, very private gyms are studios offering entirely individualized programs with one-on-one training. Aside from receiving the undivided attention of the trainer, clients do not have to take turns at the weight and exercise stations. Very private fitness facilities are appropriate for shy people and those recovering from an injury; however, with the increased privacy comes a higher fee.

4. Specialized Gym. This type of fitness center specializes in just one discipline (e.g., yoga, martial arts, boxing, rock climbing). Among the advantages of a specialized gym are top-quality equipment, skilled staff, and expert instructors. For clients who prefer to cross-train or have a varied workout program, this may not be the appropriate venue, since the staff and equipment specialize in only one activity.

Source: Choosing a gym, 2007.