Generally speaking, studio owners are artistic geniuses. You people know your stuff when it comes to quality training, correct technique, effective teaching styles, healthy parent relations, current movement trends, best business practices and so much more.
But when it comes to the minute legal details that come with opening and running a studio, there tend to be a few important tips and tricks that many aren’t aware of.
To keep you as informed and prepared as possible, we spoke to lawyer and dance enthusiast Sean Monson. He works at a firm in Salt Lake City, Parsons Behle and Latimer, and is the husband of renowned studio owner Jana Monson, of Creative Arts Academy in Bountiful, Utah.
Whether you’re a longtime studio owner or just getting started, check out these best practices to make sure you stay on top of potential legal headaches in the future.
1. Legal Entities
When you start a dance studio, you can choose to do it as a sole proprietorship or as a corporate entity. Feeling a little confused about what that means? Don’t worry—Monson gives his take.
“A sole proprietorship means you don’t form a legal entity at all,” he says. “So, if I were to start my own dance studio, I would get paid personally, and then pay my employees out of my own pocket. The downside to this is, if a student gets hurt, I am personally liable, and my personal assets can be sued by someone to satisfy a judgment. If one of your teachers injures or harms a child, and you don’t have a corporate entity, they can collect on your bank accounts, houses or cars. Everything is on the line.”
That doesn’t sound great, right? Yeah, Monson doesn’t think so either. So, he recommends you create a corporate entity. There are three main types of corporate entities: a C Corp, an S Corp and an LLC. Companies like Apple or Microsoft are C corps, and according to Monson, because of complexities, formalities and taxes, there’s really no reason dance studios need to be. So, let’s just go ahead and cross that one off our list of options.
“A dance studio should want to be an S Corp or an LLC,” he says. “There are advantages and disadvantages to both. An S Corp has some formalities and administrative headaches to it, but it’s single taxation. Meaning, when money comes in, it’s only taxed once. LLCs don’t have a lot of formality to them, but the downside is you have to pay self-employment tax. For example, if your dance studio makes $100,000 you will be taxed on that as income tax, and then all of that will also be subject to self-employment tax. I recommend that if people have an LLC, they do an S-election. If you do this, you can be taxed as though you’re an S Corp, meaning you pay yourself a salary, and only pay self-employment taxes on that salary rather than the full $100,000. Bottom line and most importantly, if you register as one of those, if someone sues you, your investment in the company will be at stake, but none of your personal assets.”
2. Owning Your Own Studio Space
If you own or are planning to buy the space your studio is in, make sure you have the real estate in a separate legal entity than your dance studio.
“I cannot underscore this enough: For liability protection, studio owners have to buy the building with a different legal entity than the dance studio entity,” Monson says. “If someone gets hurt or a teacher is inappropriate, and the dance studio owns the building, someone who sues can collect on the judgement through the building. If the dance studio doesn’t own the building, there is nothing to collect against.”
Monson recommends you set up your dance studio as an LLC or an S Corp, then set up a separate company to buy the real estate and have the studio rent from that other company.
Confused? Let’s clarify: You own both businesses, so when the studio pays rent to the company that owns the building, it’s actually just you paying money to yourself each month. This way if, say, a teacher sues for wrongful termination, they can’t collect against the building.
3. Independent Contractors Versus W2 Employees
A lot of dance studios want to pay their teachers as 1099 contractors in order to save on taxes. If they pay teachers as 1099 contractors, the teacher has to pay all of their social security and medicare taxes on their own, and the employer isn’t responsible for them. If they pay their teachers as W2 employees, the studio pays for half of their social security and Medicare taxes, while the employee pays the other half.
“The problem with that is there are limitations and guidelines about when you can pay someone as a 1099 contractor and when you can pay someones as a W2 employee,” Monson says. “If you have regular teachers at your dance studio, the IRS will likely disagree with you and see them as W2 employees. If that’s the case, you will have to pay penalties and back taxes for everyone you misclassified. It can be a huge financial headache. I know of three or four studios who were audited by the IRS and had to shut down or sell their business because of this.”
4. Noncompete, Nonsolicitation and Confidentiality Agreements
This subject can get a little touchy—and rightly so. Check out Monson’s recommendations and see if they might be a good fit for your studio.
“Have a confidentiality agreement in which employees agree not to share things like marketing strategies, business plans, how much you pay people, client contact information or other confidential information that could be used to your detriment,” Monson says. “Include a nonsolicitation agreement in that same document. This agreement means that, if they leave your studio for whatever reason, they won’t solicit your clients or other employees to leave with them and go to another studio. A noncompete agreement can be included in this as well, but you will have a hard time convincing a court to enforce it. At our studio, we don’t stop people from starting a competing business, but we try to stop them from contacting our clients. We pay them to establish a relationship with our students, so it’s only fair that we have an amount of time to protect our relationship with them.”
Monson recommends you set up an agreement that says they can’t contact the customers of your studio for one to two years after they leave your business.
“I know it’s money to talk to an attorney, but if you do it up front and make sure you have this stuff covered, you will save yourself from heartache and headaches in the future.”