Opening a Jiu-Jitsu Academy: Chapter 2 Forming the Company
By Justin Hall
Open Source Jiu-Jitsu
Forming the Company
Opening a Jiu-Jitsu Academy · Chapter Two
What this chapter covers
• Choosing and forming the right legal entity
• The S-corporation election, and whether it will save you money
• Putting an operating agreement in place, especially with partners
• Setting up business banking and building business credit
• Your licenses, permits, state tax liability, and the insurance to research and price now
• The professional team you build around you
Before any of the work in the rest of the sequence can happen, the company itself has to exist. The lease cannot be signed in your personal name. The bank loan cannot be taken in your personal name. The payroll for your first staff cannot run through your personal accounts. The vendor relationships, the insurance policies, the merchant processing for member payments, all of these require a legal business entity in place, with bank accounts and tax identification, before any of them can be set up.
This work is administrative rather than strategic, but it cannot be skipped or rushed. The decisions made here, particularly the entity structure and the operating agreement if there are multiple owners, are decisions that govern the business for as long as it exists. Get them wrong and they are expensive to fix. Get them right with the help of competent professionals and they fade into the background while the rest of the work moves forward.
Entity formation
The first decision is the entity itself. The most common structure for a single-location Jiu-Jitsu academy is a Limited Liability Company, organized in the state where the academy will operate. The LLC offers personal liability protection, tax flexibility (the LLC can elect to be taxed as a sole proprietor, partnership, S-corporation, or C-corporation depending on what serves the owner best), and a relatively simple administrative burden compared to a corporation.
Some academies are structured as S-corporations directly. Some, particularly larger or multi-location operations, are structured as C-corporations. For most first-time owners with a single location, the LLC is the right starting point, and the tax election can be revisited as the business grows.
The state of formation, in nearly all cases, should be the state where the academy operates. Delaware and Wyoming LLCs get suggested often online, but for a small-business operating entity that is not raising venture capital, forming in your home state is simpler, cheaper, and avoids the need to register as a foreign LLC in the state where you actually do business.
The formation itself involves filing Articles of Organization with the state, designating a registered agent (you can be your own registered agent in most states, or you can hire a service), and paying the state filing fee. In most states the filing can be completed online in about thirty minutes, with the LLC officially formed either immediately or within a few business days depending on the state. An attorney should review the structure before filing, but the filing itself can be done by you, by an online service, or by the attorney.
Once the entity is formed, file for an Employer Identification Number (EIN) with the IRS, and a state tax identification number from your state's department of revenue. The EIN is free and takes about ten minutes online. The state tax number is similarly quick to obtain and is required for sales tax collection, state payroll tax withholding, and state-level tax filings. Both numbers are required for the bank accounts, the tax filings, the payroll setup, and the rest of the administrative work that follows.
The S-corporation election
One decision inside the entity choice deserves its own attention, because it is where owners either save real money or create a real headache: how the company is taxed. Forming an LLC does not, by itself, settle that. By default a single-owner LLC is taxed like a sole proprietorship and a multi-owner LLC like a partnership, and in both cases all of the profit is subject to self-employment tax, the roughly fifteen percent that funds Social Security and Medicare, on top of income tax. The alternative is to elect to have the LLC taxed as an S-corporation, which does not change the legal entity at all, only how the IRS treats its income.
The reason to consider it is that self-employment tax. As an S-corporation you pay yourself a reasonable salary through actual payroll, and that salary is taxed the way any wage is. But the profit left over after your salary is taken as a distribution, and distributions are not subject to self-employment tax. If the academy nets eighty thousand dollars and a reasonable salary for your role is fifty thousand, the roughly thirty thousand taken as distributions escapes that fifteen percent, which is somewhere around four to five thousand dollars a year kept rather than paid. The numbers are illustrative, but the mechanism is real and it repeats every year the academy is profitable.
The election is not free, and it does not make sense for every academy. It only pays once the business is profitable enough that its profit clearly exceeds a reasonable salary, because the savings come only from the distribution portion, and if the salary consumes most of the profit there is little left to save on. Against the savings you have to set real costs. You have to run formal payroll for yourself, with a payroll service and the filings that go with it. You file a separate S-corporation tax return each year. Your accounting is more involved. Those costs commonly run one to two thousand dollars a year, so there is a break-even below which the election costs more than it saves. There is also a hard constraint on the salary itself: it has to be reasonable for the work you actually do, because a salary set artificially low to dodge payroll tax is exactly what the IRS looks for, and getting it wrong invites penalties and back taxes.
This is the clearest example in the whole formation stage of a decision to make with an accountant rather than alone. A good one will run your specific numbers, tell you whether the election pays at your level of profit, and set a reasonable salary that will hold up. Many owners form as a straightforward LLC, operate that way while profits are modest, and make the S-corporation election later, once the academy earns enough for the savings to clearly outweigh the cost. The election itself is a simple form filed with the IRS. The decision behind it should be run on real numbers, and revisited as the academy grows.
The operating agreement
If you are the sole owner, the operating agreement is a relatively simple document that documents your ownership and the basic governance of the company. If there are multiple owners, the operating agreement is one of the most important documents the business will ever have.
The operating agreement defines who owns what percentage of the company, who has decision-making authority, how profits and losses are allocated, how new owners can be added, how existing owners can exit, what happens if an owner dies or becomes incapacitated, and how the company can be dissolved. It is the contract among the owners that governs the business for its entire life.
The operating agreement should be drafted with an attorney. Templates from online services are inexpensive but rarely reflect the specific structure of a real partnership. A good operating agreement, drafted with the partners' specific intentions in mind, prevents disputes by defining in advance what happens in every situation that could become contested. A bad operating agreement, or no operating agreement at all, leaves the partners with state default rules that may not reflect what they actually wanted.
If you have partners, one point deserves more weight than any other, because it is the single most common way a promising academy tears itself apart. A fifty-fifty split feels fair, and it feels simple, and it is a trap. Fair and simple are not the same as workable. Two equal partners who agree on everything do not need an operating agreement at all. Two equal partners who disagree, and eventually they will, on a hire, a price change, a second location, or how much to pay themselves, have no way to break the tie, and the business simply freezes. Neither can act without the other, neither will yield, and a company that cannot make a decision slowly dies while its owners stop speaking. The time to solve this is now, while you still like each other, not in the middle of the fight.
There are a few honest ways to prevent it, and you should choose one on purpose. The simplest is to not split control exactly evenly: give one partner fifty-one percent, or a defined tie-breaking vote on a narrow set of decisions, so that someone can finally decide when the two of you cannot. A more sophisticated version, and one worth asking your attorney about, is to separate voting control from economic ownership, so the profits can be divided evenly, or in whatever ratio you consider fair, while the authority to make a final call rests clearly with one person. The split of the money and the split of the control do not have to be the same number, and pretending they must is exactly what forces people into the fifty-fifty corner. If you genuinely want equal say, then the tie-breaker has to live somewhere else, in a written dispute-resolution process that moves a deadlock through good-faith negotiation, then a neutral mediator, and finally binding arbitration, so that an outside decision-maker exists for the moment the two of you cannot agree. What you cannot do is leave it unaddressed and hope it never comes up.
Fairness is the other half, and fair is not the same as equal. A partner putting in all the cash and a partner putting in all the coaching are not making the same contribution, and the agreement should reflect what each person actually brings, in money, in work, in reputation, and in risk. Define, too, what happens when a partner simply stops pulling their weight, because that quiet erosion, not a dramatic falling-out, is the more common problem.
This is the place to be clear about two very different kinds of ownership, because treating them as the same is one of the costliest mistakes a founder makes. Purchased equity is ownership someone paid for with actual money, capital they put into the business and put at risk. Sweat equity is ownership granted in exchange for work, a coach who takes a share for building the program and teaching rather than for writing a check. They are not equal, and the agreement should not pretend they are. Money that is already in and at risk sits first in line. Purchased equity is priority one: in distributions, and especially if the business is ever wound down or sold, the partners who put in real cash should have that capital returned before the sweat-equity holders share in what is left. The person who risked their savings is not in the same position as the person who promised their time, and the agreement should say so plainly.
The deeper issue with sweat equity is that, at the moment you grant it, it has not been earned yet. It is a promise of future work, and future work is exactly the thing that does not always show up. That is what vesting is for. Vesting ties the ownership to the work actually done: instead of handing a coach their full share the day they sign, the share is earned in pieces over time, say in equal parts across three or four years, so that a partner who stays and contributes earns the whole stake while a partner who leaves early earns only the portion they actually worked for. Vesting is what turns sweat equity from a gift into a wage paid in ownership.
There is a stronger version worth considering, and for a first-time founder it is often the right one: structure it so that ownership does not pass at all until the sweat-equity partner is fully vested. Under an ordinary vesting schedule, a partner who leaves halfway through still owns the half they earned. Under a full-vesting condition, they own nothing until they have gone the entire distance, and if they leave before then the equity simply never transfers and stays with the company. It asks more of the sweat-equity partner, and a genuinely committed one will accept it, because they intend to be there anyway. What you must not do, under any version, is the thing that feels generous and friendly in the excitement of starting: hand someone a meaningful share of sweat equity with no vesting plan at all. That is the trap. A coach given thirty percent to come aboard, with nothing tying it to the work, can walk away in a few months owning thirty percent of an academy they did almost nothing to build, and there is no clean way to get it back. Sweat equity without an acceptable vesting plan is not a partnership. It is a giveaway you cannot reverse.
Beyond the split itself, a real operating agreement settles the following in advance, while everyone is still reasonable, rather than after a dispute, when no one is:
Decision-making and the tie-breaker. What requires unanimous agreement, what can pass by a majority, and how a genuine deadlock actually gets broken. This is the provision that keeps the business able to act at all.
Buy-sell and exit. What happens when a partner wants out, dies, becomes disabled, or divorces, and above all how the departing share is valued and paid for. Agree the valuation method now, because agreeing it in the middle of a breakup is nearly impossible.
Equity type and vesting. How, and over what period, each partner earns their equity, that purchased equity ranks ahead of sweat equity, and the firm rule that no sweat equity is ever granted without a vesting plan.
Contributions and distributions. Who put in what, whether more can be called for later, and how and when profit is actually paid out.
Compensation versus ownership. The wage a partner earns for coaching or running the desk is not the same thing as their share of the profit, and confusing the two is a frequent and bitter source of conflict. Separate them explicitly.
Amendment protection. What it takes to change the agreement itself, so that a majority cannot quietly rewrite the deal against a minority partner down the road.
Dispute resolution. The step-by-step path a serious disagreement follows, from negotiation to mediation to binding arbitration, before it can ever reach a courtroom.
None of this is legal advice, and none of it is the attorney's job to decide for you. The attorney drafts the document, but you and your partners have to decide what you want it to say, and that is the harder and more important part. Walk in having thought through every one of these, and the tie-breaker above all, because the few uncomfortable conversations they require now are nothing against the cost of the dispute they are built to prevent.
Banking and credit
With the entity formed and the EIN in hand, the next step is business banking. Open a business operating account at a bank where you have a relationship and can speak directly with a business banker. Open at minimum two accounts to start. An operating account for the day-to-day income and expenses, and a separate savings account for tax reserves and operating cushion. As the business grows, additional accounts for payroll and other functions can be added.
The discipline of keeping business and personal finances separate is absolute. No personal expenses from the business account. No business expenses from your personal accounts. Mixing the two undermines the liability protection the LLC was supposed to provide, in a doctrine called piercing the corporate veil, and it makes accounting and tax preparation enormously more complicated than it needs to be.
A business credit card is also worth setting up early, in the company's name, used for business expenses only. Most cards in this category are tied to the owner's personal credit at the start, which is fine for a sole owner but carries a real risk once there are partners. Over time, as the company builds its own credit history, business credit becomes available on the company's own credit. The credit card simplifies expense tracking, builds business credit, and creates a payment buffer between when expenses are incurred and when cash leaves the operating account.
A business line of credit, if available, is worth establishing before you need it. The right time to apply for a line of credit is when you do not need one, because lenders are more willing to extend credit to businesses that are not in distress. The line sits unused until something unexpected requires it, at which point it becomes the difference between handling the surprise calmly and scrambling to fund it from working capital.
There is a warning that belongs here, and it matters most once you have partners. A card, a loan, or a line of credit tied to your personal credit is your debt, personally, no matter that every dollar of it was spent on the business. That is easy to forget while everyone is getting along and expensive to remember later. If you ever leave the partnership, that personally-guaranteed debt does not simply go with the business. The remaining partners are not obligated to assume it just because you ask, and nothing forces them to keep paying it, at which point the creditor comes after the name on the account, which is yours, even if the business itself later closes its doors. The debt can outlive the partnership and outlive the business, and it lands on whoever personally guaranteed it.
So be deliberate about whose name backs the credit, and do not treat a card in your name as harmless just because the company is paying it this month. Where you can, move business borrowing onto the company's own credit as soon as it qualifies, so the personal guarantee falls away. Where you cannot, do not let all of the personal exposure pile onto one partner by default, and spell out in the operating agreement what happens to personally-guaranteed debt when a partner exits: who assumes it, on what timeline, and what indemnification applies if they do not. This is exactly the kind of contingency the exit provisions are there to cover, and it is far cheaper to write down now than to fight over after the fact.
Licenses, permits, taxes, and insurance
The academy will need several licenses and permits before it can legally operate, and the list is longer than most first-time owners expect. Requirements vary by city and state, and not all of these will apply to you, but you should know each one exists so you can check it rather than discover it later. The ones that most often catch an academy owner off guard include:
Business license. The basic license to operate at all, sometimes called a business tax certificate or receipt, issued by your city or county. Almost every jurisdiction requires one, and it is easy to skip precisely because it feels too basic to need.
Fictitious name, or DBA, registration. If you operate under a name different from your LLC's legal name, most states or counties require you to register that assumed name.
Sales tax and reseller's permit. A sales tax permit to collect and remit tax on the pro shop, and in some states on memberships, plus a reseller's permit that lets you buy pro shop inventory wholesale without paying sales tax yourself, since you collect it on resale.
State employer registration. An account with your state for payroll tax withholding, required before you run payroll for your first employee.
Zoning and use approval. Confirmation that the space is zoned for a gym, instructional, or assembly use, which in some areas means a specific conditional use permit for a recreational facility.
Certificate of occupancy. The building department's certification that the space is legally safe to occupy for its intended use. You cannot open without it, and it comes after the buildout and a final inspection.
Fire department approval. A fire inspection, a posted occupancy load, and the required extinguishers, alarms, and clear exits. A room that fills with people for class draws real attention here.
Sign permit. Many cities require a permit for exterior signage, with rules on size, lighting, and placement. It is one of the most commonly overlooked, and an unpermitted sign can be forced to come down.
Music licensing. If you play recorded music in class, and nearly every academy does, public performance licenses from the performing rights organizations, ASCAP, BMI, and SESAC, are technically required in a commercial space. This is the one almost nobody knows about until a letter arrives.
Background checks for youth staff. If you run a kids program, some states and localities require background checks for anyone working with minors, and it is worth doing even where it is not required.
Alarm permit. Some municipalities require a permit to operate a monitored security alarm.
Health permit. Generally not needed for a gym, but if you sell food or drinks, even a small shake or smoothie bar, one usually is.
Your attorney can confirm what is required in your specific jurisdiction. The local Chamber of Commerce or Small Business Administration office is also a useful resource for the licensing requirements for a small business in your area.
Taxes deserve a closer look than most first-time owners give them, because the rules vary sharply from state to state and getting them wrong is your liability, not the state's. The question that matters is what your state actually taxes. Most states tax the sale of goods, so your pro shop sales of gis, gear, and apparel are taxable, but do not tax services, which means memberships and instruction are not. In those states you collect sales tax on the pro shop and not on tuition. Other states tax services too. New Mexico, for one, levies a gross receipts tax that applies to services and products alike, which makes your membership revenue itself taxable, and several states specifically tax gym, fitness, or recreational memberships even while exempting other services. You cannot assume, and you cannot copy what an academy in another state does. Before you set your pricing or configure your billing, understand your full tax liability in your own state: what is taxed, at what rate, and how to register, collect, and remit it. Your accountant and your state's department of revenue are the sources. If your state taxes memberships and you did not collect it, you still owe it out of your own pocket, with penalties and interest, and you have to unwind it with every member, so it is far cheaper to build it into your pricing and your system from the first day.
Insurance is the other piece to set up now, even though the active policy does not begin until later. During formation you research it, price it, and line up the broker, so that coverage can bind and switch on at the right moments: pre-opening or builder's-risk coverage when the buildout begins, and full operating coverage in force by the day you open. Getting quotes now is what lets you budget accurately and keeps insurance from becoming a last-minute scramble.
The core coverage an academy needs is specific. General liability, which protects against member injury and property damage claims, is the foundation, and it should come from a broker who specializes in martial arts, because a specialist policy is meaningfully different, and usually better priced, than generic small-business coverage. Premises and property coverage protects the building, the equipment, and your tenant improvements. Workers compensation becomes required in most states the moment you have your first employee. And pre-opening or builder's-risk coverage protects the space during construction, before any of the operating policies are active.
Pay as much attention to the limit as to the policy. Most commercial landlords require at least one million dollars in general liability as a condition of the lease, and require being named as an additional insured on it, so one million is often the floor your lease sets rather than a number you choose. Treat it as a floor, not a target. A serious injury in a grappling academy can produce a claim well past a million dollars, and if you personally have assets worth protecting, a policy at the bare minimum leaves the rest of what you own exposed. An umbrella, or excess liability, policy stacks additional coverage on top of the base for a usually modest premium, and the more you have to lose, the more that extra layer earns its cost. Set your limits against your real exposure and your net worth, not merely the landlord's minimum.
Then ask the specialist broker what a standard policy leaves out, because an academy carries exposures a generic gym does not. Abuse and molestation coverage is essential for any academy with a kids program, and increasingly required, because standard general liability does not include it. If you host tournaments, in-house competitions, or seminars, those events can fall outside an everyday policy and need their own event coverage or a rider. Depending on what your academy does, product liability for what you sell in the pro shop, professional liability for your instruction, and participant accident coverage may each be worth pricing. The goal is not to buy every policy that exists. It is to have someone who knows martial arts walk you through what your specific academy actually exposes you to, so that nothing important is missing on the day you open.
The professional team
Several professional relationships should be established during the formation work, because each of them will be doing meaningful work in the months that follow.
The lease attorney will be central in Lease Negotiation, and that relationship should be in place before Site Selection finalizes.
The accountant should be retained to advise on the entity tax election, to set up the bookkeeping structure, and to handle the tax filings the new entity will be responsible for. A good accountant pays for themselves through tax planning alone, particularly around the question of how the LLC should be taxed.
The bookkeeper, who may be the same person as the accountant or may be a separate role, should set up the books from day one. Most failed first-year academies have books that are months behind because the owner never built the habit of monthly closes. Hire the bookkeeper, set up the close cycle, and stick to it.
The insurance broker should be sourced through referrals from other academy owners or from your accountant. A martial-arts-specialist broker will produce significantly better coverage at significantly better pricing than a generic small-business broker.
In summary
Forming the company is the unglamorous groundwork everything else sits on. The entity, the operating agreement, the banking, the licenses and insurance, and the professional team are what turn a plan into a business the law and the bank recognize. None of it is exciting, and all of it is far cheaper to do correctly now than to fix later.
Checklist
☐ Choose your entity, an LLC for most single-location academies, and form it in the state where you operate
☐ File your Articles of Organization, designate a registered agent, and get your EIN and state tax ID
☐ With your accountant, decide how the company is taxed: default LLC or the S-corporation election
☐ Draft and sign an operating agreement with an attorney, not an online template
☐ If you have partners, build in a tie-breaker so a 50/50 deadlock cannot freeze the business
☐ Set vesting for any sweat equity, confirm purchased equity ranks first, and agree buy-sell, exit valuation, and dispute resolution in advance
☐ Open separate operating and tax-reserve accounts, and keep business and personal money strictly apart
☐ Set up a business credit card and a line of credit, and if you have partners, settle who is personally liable for any individually-guaranteed debt
☐ Work through the full license and permit list for your city and state, including the ones people miss: DBA, certificate of occupancy, sign, fire, and music licensing
☐ Confirm your state's tax rules on products and memberships before you set pricing or billing
☐ Research and price insurance with a martial-arts broker, set limits to your net worth rather than just the landlord's one-million minimum, and cover abuse, molestation, and any tournaments you host
☐ Line up your attorney, accountant, bookkeeper, and insurance broker
Justin Hall
Co-Founder, Open Source Jiu-Jitsu
Open Minds. Open Mats. Open Source. · Chapter Two of the series Opening a Jiu-Jitsu Academy