Choosing the Right Business Structure for Pilates Studios: Lessons from COVID-19 and Beyond
Welcome to the second of ten focused blog in our special series on What makes a Pilates studio truly profitable. Drawing from my 20 years of experience in owning, running, and consulting for Pilates studios, I focus here on initial choice of Business structure and its importance in developing a profitable Pilates studio.
In the UK, the financial landscape of Pilates studios varies widely. Boutique Pilates studios, typically sized between 800 to 2000 square feet in leased buildings, see turnovers between £200K and £400K, with net profits ranging from a loss to 20%. In contrast, smaller home-based studios, spanning 300 to 700 square feet, have turnovers between £30K and £80K, and net profits range from 10% to 30%. These figures are grounded in the realities of running such businesses, where "turnover is vanity, profit is sanity, but cash is king."
But don’t just gloss over the statistics above in the dynamic landscape of the fitness industry where net profit margins of 5-15% are deemed successful businesses, Boutique Pilates studios with potential to reach net profits of 20% - 30% should be very attractive. These businesses are unique spaces dedicated to enhancing physical and mental wellness. Whilst the financial success of these studios can vary significantly, the choice of business structure - be it a limited company, sole trader, or partnership - plays a crucial role in the resilience and success of a Pilates studio, and may be the difference between business failure and long-term success. The COVID-19 pandemic, which led to the closure of over 20% of UK Pilates studios, has underscored the importance of this decision. Insights from the initial transcript and broader industry data, highlight the advantages and challenges of each structure, particularly in the context of tax benefits, relationship dynamics, and liability risks.
Limited Company: A Preferred Choice for Long-term Stability
Advantages in Profitable Studios:
Profitable Studios: Often opt for a limited company structure due to its distinct tax advantages and limited liability. This structure provides a safety net during unforeseen circumstances, like the COVID-19 pandemic, allowing studio owners to negotiate more effectively with landlords and banks. Limited liability also means personal assets are protected in case of business failure.
Why Less Profitable Studios Struggle:
Less Profitable Studios: That did not choose a limited company structure often faced more severe consequences during the pandemic. The inability to separate personal and business liabilities meant greater financial risk and difficulty in negotiating favourable terms during crises.
Sole Trader: Simplicity, but with Increased Personal Risk
Benefits and Drawbacks for Studio Owners:
Benefits: The sole trader structure offers simplicity and direct control, which can be appealing for new or small-scale studio owners. This structure allows for easy setup and straightforward tax reporting.
Drawbacks: The major downside is the lack of distinction between personal and business liabilities. In challenging times, such as the pandemic, sole traders faced significant personal financial risks, including the potential loss of personal assets and Taxation of all profit with NI and Incometx rates far higher than corporation tax rates can lead to money being given to inland revenue which with a different structure could be allocated to the development of the Business
Partnership: Collaborative but Potentially Complex
Potential for Success and Risk in Partnerships:
Success Factors: Partnerships can bring diverse skills and shared responsibilities, which can be beneficial for a Pilates studio. When partners work harmoniously with aligned goals, the studio can thrive. However, in my experience, there is virtually a 100% likelihood of failure in the medium to long term unless complex and expensive partnership agreements are skillfully worked out together with lawyers a little bit like a pre-nuptual in a marriage, where partners are less than certain about longevity of the marriage.
Risks and Challenges: Partnerships more often than not are fraught with challenges, especially if there are discrepancies in work ethic, life changes, or financial contributions. Over time, these issues can lead to relationship strains, making the business vulnerable. The pandemic highlighted how partnerships without clear agreements could struggle during crises, with disagreements over financial decisions exacerbating the challenges and creditors like landlords targeting one of the partners, rather than the other if they could see a difference in personal wealth.
Limited Liability: A Safer Bet During Uncertain Times
Why Limited Companies Fared Better During the Pandemic:
The COVID-19 pandemic illustrated that studios operating as limited companies were in a better position to withstand economic shocks. The structure provided a buffer for personal assets against business debts, and facilitated more effective negotiations for financial support or restructuring.
Conclusion:
The choice of business structure is a critical decision for Pilates studio owners, with each option presenting its unique set of advantages and challenges. The experience of the COVID-19 pandemic has particularly highlighted the benefits of operating as a limited company, offering resilience through limited liability and tax advantages. While sole traders and partnerships offer simplicity and collaboration, they come with increased personal risks and the potential for internal conflicts. For those seeking a balance between risk management and operational flexibility, the limited company structure emerges as a favoured choice, providing a solid foundation for growth and stability in the ever-evolving landscape of the Pilates industry.
Author: Chris Onslow - Pilates Consultant
Chris Onslow, has run Pilates focussed businesses since 1998. He and his team specialise in supporting Pilates entrepreneurs and business owners. With a rich history of owning and running successful Pilates studios in the UK, and supporting others in Europe and the Middle East, Chris has broad expertise in maximising profitability and optimising operational efficiency. His agency provides top-tier advice on selecting new, pre-owned, and hireable Pilates equipment from renowned brands such as Align-Pilates, Balanced Body or Stott-Pilates/Merrithew. As the founder of Mbodies Training Academy, Chris continues to revolutionise Pilates education, offering premier online and hybrid CPD and qualification courses for Pilates apparatus instruction and special population CPD. Discover more about how Chris can support your Pilates Business or home exercise choices at www.pilates-consultant.co.uk