Dojo Legal Formation in Detail
In the previous post, we provided our recommended checklist for opening a Dojo. Next, we will go further in detail and explain why these steps are important. The legal steps for creating a Kendo or Iaido organization takes time, effort, and money. This may be tedious and discouraging, but managing a Dojo or even an informal club requires even more work.
We feel all of these steps are a crucial starting point for ensuring the safety of all individuals and for ensuring the longevity of the organization. Even if the odds are minimal, it would be unwise to not take the necessary steps to protect yourself and other members of the Dojo from the negative consequences of physical injuries, financial missteps, sexual misconduct and/or other legal issues.
About the Authors
Mark Kerstein and Shamina Chang are attorneys at The Law Office of Mark A. Kerstein, based in Houston, Texas. They instruct and practice Iaido and Kendo at the Houston Kenshikan, LLC, a 501(c)(3) non-profit organization. They have helped create legal entities for several Dojo, as well as have helped those organizations achieve 501(c)(3) status.
1. State Registration
To register with your state, we recommend creating a Limited Liability Company. There are a number of advantages to operating a Dojo within the umbrella of a corporate entity.
By registering with the state, the entity can be used instead of an individual, to do things, such as:
Rent space: the entity would then be responsible for the rent and insurance obligation
Open a bank account: managing finances through that account would place any tax responsibilities on the entity.
In addition, personal liability would be limited in the event legal issues arise, such as an injury to a student. Keep in mind, this registration only helps to limit liability. It does not completely eliminate all liability.
The LLC Structure
There are different types of corporate structures. There are for example: corporations, partnerships, and limited liability companies. We recommend an LLC or similar Limited Liability Company structure for the Dojo entity because it provides all of the protections of a corporate entity without the formalities that are required to run a corporation. Corporations require shareholders, annual shareholder meetings, formal written notices regarding those meetings, several officers, a Board of Directors, corporate by-laws, etc.
Make sure to have a professional handle these entity formation issues. There are a lot of details that need to be dealt with in forming and registering an entity, and a lawyer can take care of it for you or guide you through it. If you do not have experience in this and try to do it yourself, you could make mistakes and mistakes can be costly.
If you don’t want to spend the money, then your members are open to liability from injuries sustained during practice or worse. Dues will be considered as personal income by the IRS. Individuals will be on the hook for facility rentals.
What if My Dojo Exists and Isn’t an LLC?
If your entity presently exists under a different corporate form and you want to change it to an LLC, then the LLC will need to be registered with the state first. The assets of the present entity would then be transferred to the LLC, and the old entity would need to be dissolved.
2. Federal Registration
In addition to registering your Dojo with the state as a LLC, we recommend obtaining an Employer Identification Number and applying for non-profit status.
Required to open a bank account and to file taxes.
Reduces the necessity of using your personal social security on many forms and applications.
By obtaining federal non-profit status, the Dojo will not have to pay any income taxes. The status allows the Dojo to simply file a “postcard” for a tax return, unless yearly revenue exceeds $50,000. In addition, some banks will waive fees for nonprofit entities.
3. Opening a Bank Account
Lastly, it’s important to open a bank account for the Dojo. In order to prevent tax liability, it is best to run all transactions through a separate bank account instead of your personal. Some banks waive fees and/or minimum deposit levels for registered nonprofits.
With a bank account, the Dojo can utilize payment apps like Zelle or Paypal. This will minimize bookkeeping.
We went over some of the details and reasons for taking the steps needed to start a Dojo. In our next post, we will go over maintaining legal standing and IRS compliance. If you have any specific questions, we would be more than happy to help.
Please understand, we are not your lawyers and the contents of this post are not legal advice. This is a very basic guide and meant to inform based on publicly available information. We can, and have, helped people form entities in a number of states and can assist with the process, but to do so we would need to enter into an attorney-client relationship. Nothing about this post creates that relationship.