legal

When Two Become One: Dissolving a Partnership

When Two Become One: Dissolving a Partnership

Like the splitting up of once head-over-heels newlyweds, the parting of ways in business is often tricky, sad and more than a little complicated. Add in the complexities of an all-star cheer business, and breaking up can get downright sticky.

So what happens when one of the partners of an all-star gym wants to retire or pursue other passions?

Legal experts advise not waiting until one person is ready to retire—or wants out—to discuss what will happen with your beloved gym. Business litigator Jay McDaniel, founder of the McDaniel Law Firm, P.C. says it’s imperative to think about not just getting into a business but getting out of it—especially when it comes to cash.

“The cost of not having planned for the exit as one of the principal owners of the business is usually multiples of hundreds of what it would have cost to have done it at the time,” he says.

For Freedom Athletics, Inc. founder and owner Nancy McDowell, buying out her partner in 2006 was pretty straightforward and snag-free, even though she and her partner had never discussed what might happen with the gym if either coach wanted out. At the time they started Freedom from scratch in 2003, McDowell says, “it was just bubblegum and lollipops. We were coaches. And we had all these kids and it was awesome.”

Fast-forward three years, and McDowell’s partner decided she wanted to pursue other career paths. Fortunately, she says, the gym’s attorney was a family member, so the transfer of ownership was seamless. And according to McDowell, there has never been a hint of ill will: “We have a very good relationship. She’s done choreography for me [since the split], so it worked out really nicely.”

D.S. Briggs, Tumbling Director of Metro East St. Louis-based Pride Kids Sports Center, has a different perspective on buyouts. Years ago, he was a staff member of a buyout that was initially treated like a merger so as not to lose key support from its team families and community. In that situation, the gym he was employed by wasn’t necessarily looking to buy or acquire another program, but when they were approached by another gym to join forces to compete with a mega-gym moving into the area, the merger worked—at first.

“Maybe about a year or two later, we ended up buying the program out completely [rather than being equal partners] because things had deteriorated to the point they had no option but to sell,” he says.

Briggs says to make these types of buyouts work, the new owner needs to be sensitive to just who the “old” gym was. “The gym that is taking over has to respect the client and the culture of the smaller gym,” says Briggs. “It takes time to assimilate a whole gym culture into a different culture; it can’t be rushed into or expected to survive without hard work by the perceived leaders in both gyms.”

And, as always, communication is key, says Briggs. “You have to have a lot of open honest discussion about the goals, hopes and dreams, and what really are the personal dreams and philosophies of both programs,” he explains. “You have to figure that out right from the beginning. Otherwise, it’s not going to work at all.”

And when it comes to what McDaniel calls “business divorce” (when one partner wants out), he says most business owners don’t prepare for it when they are just starting out. In his experience, only about 25 percent of his clients have given it real thought. Most, he says, find it difficult to focus on an event that could be 25 years away. “The idea is, ‘we will deal with it someday’ or ‘yeah that’s a good idea’. [They always say], ‘We’ll get back to you,’” shares McDaniel.

Avoid that trap and start planning now for a smooth exit with these helpful tips:

1.   Put in agreements to buy and sell. “You come to agreements on how you are going to value the business and you put in place funding for it,” says McDaniel. “That way, the person who stays has funds to buy the other person out.”

He adds that one effective way to do that is by taking out life insurance policies on the principals of the company. With that method, if one of the co-owners dies, the business will have the proceeds of the life insurance policy to pay their family the value of their share of the company.

And when it’s time for retirement, the business will have the cash value of the life insurance policy to pay the retiring partner or withdrawing partner.

2. Incorporate a deadlock clause. McDaniel also suggests putting a deadlock clause into a well-drafted business plan, which can save a lot of heartache down the line. “It basically says that if we can’t agree, then I can make an offer to buy a proposal,” he says.

3. Steer clear of a DIY split. Things can get particularly dicey when the people splitting up attempt to do it themselves. That’s a big no-no, according to McDaniel: “Never do it yourself. About half of my litigation cases come from do-it-yourself business entities. Get a decent lawyer.”

4. Communicate, communicate, communicate. In McDowell’s case, she feels fortunate the process went so smoothly. A key ingredient, she stresses, was talking through everything from the beginning. “Be very honest and upfront from the get-go. Be very clear about what you want. And put it in writing.”

-Lindsay Martell

The Info on Incorporating

The Info on Incorporating

Considering getting incorporated? We asked legal expert Trippe Fried to give us the skinny on several types of corporations that may work well for gym owners:

Subchapter S-corporations (“S-corp”): Profits and losses flow through to the owners. There are some requirements to qualify, the key one being that all of the owners must be U.S. citizens or have U.S. residency. LLCs function very much like subchapter-S corporations, but the nomenclature is different. (For instance, LLCs have members instead of shareholders).

Subchapter C-corporations: These are subject to double taxation (i.e. on both profits and dividends). For start-up businesses, that often does not matter or only has marginal consequences.

Close corporations: Some states recognize what are called “close corporations.” These will have a small number of shareholders and the filing/paperwork requirements are often less stringent.

Visit our “Biz Docs” section for handy forms and resources.

LLC Vs. Corporation?

LLC Vs. Corporation?

As a new gym owner, looming legal and business matters can flummox you—among them the decision whether to file as an LLC or corporation. Infiniti Elite Athletics owner Cari Ann Bulzone says filing as an S-corp was one of the first things she did when she took over the program from its previous owner in 2012—and it was a learning experience every step of the way. “It’s not something to take lightly; gym owners should definitely do their homework,” says Bulzone, who used LegalZoom as a resource and to facilitate filing.

Whether you go the DIY route like Bulzone or consult a lawyer, here are a few things to consider during the decision-making process:

Liability: Trixie Bennett, executive director of finances/services at Copperas Cove, TX-based GymKix, says that when the gym was set up, protection from liability was her top priority. She chose to go the LLC route because it’s cheap and quick: “LLCs are like the “low-fat” versions of corporations. It gave us the same legal protection as a traditional corporation but with half the ‘fat’ [aka red tape],” says Bennett.

However, both models offer some protection from liability, according to Washington, D.C.-based attorney Thomas J. Simeone. “Both a corporation and LLC limit the liability of the owner for claims against and debts of the company. That is vital,” says Simeone. “But setting up and maintaining a corporation can be more expensive and inconvenient than doing the same for an LLC. For example, corporations may require annual meetings, directors, by-laws, etc. So, for newer and smaller businesses, LLC’s are popular.”

Taxes: From the tax perspective, many gym owners might be better off filing as an LLC. “Unlike corporations, LLCs don’t suffer from double-taxation, in which the corporate entity is taxed and then its shareholders’ dividends are taxed as well,” says Bennett. “Corporations have to pay tax on their earnings before passing the profits through to shareholders to be taxed.”

For example, at GymKix (which is an LLC), any earnings or losses “pass through” to the co-owners and are included on their individual tax returns and taxed at their individual income tax rates. “If you’re a single owner, this might not be too good at tax time as all the profits would be added to your individual income tax return,” cautions Bennett.

Healthcare: When David Skaw, owner of Clackamas, OR-based Thunder Elite All Stars Inc. chose to go the corporation route, healthcare was a prime consideration: “For us, the ability to write off 100 percent of health benefits for officers is important. You can’t do that as an LLC.”

Future Plans: Bulzone of Infinite Elite had the big picture in mind when she decided to file as an S-corp. “I like the idea of being able to bring in other partners; that way, I can offer long-term coaches a little bit more in the future should they want it,” says Bulzone. “I have such great employees who work so hard, and increasing their responsibility will only get you so far. Eventually, I can look at them and say, ‘Would you like to own a part of Infiniti Elite?’” She adds that having an S-corp also allows her to leave her own options open: “Should I decide to leave the program, I wanted the option to pass my shares on to someone else so that the corporation could continue thrive without me if that was ever in the cards.”

Multiple Locations: Skaw of Thunder Elite says if you’re a single-location gym, LLC can be a very viable option. However, “if you have multiple partners and multiple locations, a corporation makes more sense,” he advises. And gyms can have it both ways—even if a gym starts out as an LLC, it’s possible to make the switch to corporation as your business grows and multiplies. “Most states have conversion statutes where you can convert from one to the other,” says New York-based attorney Trippe Fried.

However, switching may be time-consuming and/or expensive. “Though you can switch back and forth, there are fees, and in some states like New York, it can be complex,” says Fried. “You [also] have to transfer the corporate documents into LLC documents or vice versa, so there is some paperwork involved.” In some states, gym owners must go as far as creating a separate entity and then merging the LLC into the corporation (or vice versa). “The result is the same, but it’s a little more expensive from a filing perspective and considerably more paperwork,” points out Fried.

-Dinsa Sachan

Visit our blog for a rundown of the different types of corporations that might work well for gym owners! You can also find handy forms and resources in our “Biz Docs” section.

What’s In a Name? A Lawyer Weighs In

What’s In a Name? A Lawyer Weighs In

Need a legal leg to stand on when it comes to others copying your gym? One attorney says that your imitator may be liable of “causing confusion.”

“There’s no reason in the world why a gym cannot have a trademark in its name [or] its logo. And there’s no reason that a gym can have a trademark in its color combination the way a university may have,” says James Astrachan, former chair of the Intellectual Property Committee of the Maryland State Bar Association.

If you trademark your team’s name, logo and/or colors, your gym is referred to as the “senior user,” Astrachan notes. He adds that a gym owner is then protected from “a junior user—a johnny-come-lately using those logos and colors.”

Another gym using your brand marks can be embarking on “infringing conduct,” because this is likely to cause confusion between them and you as the senior user, he says, or imply an affiliation or endorsement that is not there.

Trademarks are protected federally under the Lanham Act of 1946, and even slight variations of a trademarked logo are not acceptable. “If there’s likely to be confusion, there’s infringement,” says Astrachan, who also teaches Trademark and Unfair Competition at the University of Maryland Law School. The Lanham Act forbids, in part, that which “is likely to cause confusion, or to cause mistake, or to deceive as to the affiliation, connection or association of such person with another person.”

His recommendation is that new gyms go to a lawyer and order a trademark search, as there are databases full of registrations, articles and other information that can be mined to determine that your intended name, logo and/or colors have not already been trademarked.

“A lawyer would give somebody a clearance that the mark that you have determined to use is not likely to cause confusion with another existing mark in your marketplace,” Astrachan says.

Make Your Mark: Protecting Your Gym Brand

Make Your Mark: Protecting Your Gym Brand

You’ve worked hard to establish your own gym, creating a unique identity with colors, logo and uniforms. A few years later, having built a solid reputation, you’re at an event when in swaggers a brand-new team—wearing colors very similar to yours, a logo that looks awfully close to yours and (wait for it) practically the same name as yours, just with a different spelling.

Is this a scenario for yet another Bring It On movie? Unfortunately, no. It’s an all-too-common occurrence for many all-star cheer programs. In fact, that’s exactly what happened to Leslie Pledger-Griffin and her Renegade Athletics teams a few years ago. “We’re at a competition, they walk in [with] our same colors, same name, very similar uniform,” she says. “My kids and the parents were like, ‘What’s going on here?’”

Adam Rufkahr’s St. Louis, MO-based Platinum Athletics has seen its own imitators as well. “We actually have had two gyms that have started up using a version of our gym name or trying to copy older versions of our uniforms,” he says. “Thankfully they weren’t anywhere around us, so they didn’t really cause us too many problems, but it is frustrating.”

And Courtney Smith-Pope, owner of Cheer Extreme, was even surprised to find herself in the competition event business—or so it seemed when a company popped up called “Cheer XTREME Events” using actual photographs of her athletes in uniform, complete with her gym logo.

All three gym owners had put a lot of thought and effort into creating a brand for their own gym, so to see imitators was not something to be taken lightly.

“We have taken steps to protect ourselves locally and to keep things like our logo, uniform, routines, etc., safe from others trying to duplicate them,” says Rufkahr. “For instance, we ordered fully custom uniforms from GK to make sure that not only are we getting the best product in the business, but also they will not use or duplicate our design for any other program.”

Renegade Athletics and Cheer Extreme both have trademarked logos, according to their owners, but even that is not foolproof. “We went through the whole trademarking process several years ago, and unfortunately you can only trademark certain logos and certain words,” says Pledger-Griffin, giving the example of another team that is Renegade All-Stars—which she cannot prevent: “We can only protect Renegade Athletics.”

Logo is another entity that can be hard to make bulletproof. Adds Pledger-Griffin, “I can protect my certain logo that is on my website and my uniforms and things like that, but if [others] put any kind of discrepancy in that logo that would not make it exact, then you can’t really [prevent] that.”

Smith-Pope says that she uses her gym’s logo on all uniforms, rather than the words “Cheer Extreme,” as protection for her brand. “It’s harder to own the words ‘Cheer Extreme;’ it’s much simpler to trademark an actual brand symbol,” she says. “Any picture that involves any of our athletes automatically has our logo in it and subjects it to our rights. If things are going to be photographed, include your logo and (have) your logo trademarked.”

Jim Lord, executive director of the American Association of Cheerleading Coaches and Administrators, says that the first step to protecting your brand is to look at your gym as a business, not just something you love. Trademarking your team’s name or logo is simply protection, he says, because if you find your gym in conflict with another, having the paperwork registering your trademark is proof in your pocket.

Details matter as well: “The more specific you are about what you’re protecting, the better you can do,” Lord says. “You’re going to have a hard time protecting the words ‘Elite Cheerleading Center’ [because] it’s already all over the place. But what [you] could do is have ‘Elite Training Center’ and have a special way you put it together, our logo, whatever our mascot is, so you have a specific mark, that then really becomes more of what you can trademark.”

Lord also recommends gym owners go to their chamber of commerce for guidance on local laws. Having an attorney on retainer is helpful, he says, because they can be familiar with your business and ready to go to work for you.

“In some cases, a simple cease-and-desist letter from an attorney is going to be enough to make somebody change,” says Lord. “[It can] make the [imitator] re-think, do you really want to go to court over this or do you just want to come up with your own logo?”

Can there be a happy ending to these situations? Smith-Pope, for one, resolved the problem easily after a conversation with the event producer. “He was great about it, he took all the words down, he took down the pictures,” she says. “He understood and had an appreciation for the work that we’ve done and what we’ve built.”

Rufkahr says he felt it best to take the high road and that gyms with the same name can possibly co-exist. “I think it comes down to focusing on your gym and your product and making it the best it can be,” he says.  “One thing my mom always told me is, ‘Imitation is the most sincere form of flattery,’ so when you look at it like that, really, it’s a compliment.”

-Jennifer Deinlein

Intrigued? Visit our blog for more tips from lawyer James Astrachan on the legal aspects of protecting your brand!