Business Structures, Essay Example

Pages: 1

Words: 685

Essay

Questions:

2. What are some dangers of operating a restaurant as a partnership?
3. If you wanted to operate your restaurant as a corporation but be taxed as an individual, how could you arrange this?
9. As a limited partner

Responses:

A2. If a restaurant is run as a partnership, the owners will have unlimited liability. This means that the liabilities of the restaurant will be indistinguishable from the liabilities of the owners and the owners could be taken to court if the business can’t fulfill its loan obligations. In addition, even if an individual owner didn’t play a role in the decision that resulted in obtaining a loan, he/she would still be responsible if the restaurant cannot pay the loan (Mintz). If an individual is concerned about the unlimited liability aspect of partnership, he/she could choose to be a limited partner in which case he/she would only lose the capital invested in the restaurant (Farlex, Inc.).

Another disadvantage of operating restaurant as a partnership is the limited life of the business. The restaurant will cease operating if one of the partners dies. Alternatively, the restaurant may also close if the partners decide to mutually dissolve their partnership agreement (Coollawyer.com).

In addition, partners often have equal power and responsibility which makes it difficult to reach conclusions when partners may have significantly different vision of the business. Moreover, partnerships often involves friends and families which further complicates the matters because relationships have to be protected, too, thus, the partners may not reach agreements which will be in the best interest of the business.

A3. If the owners want to operate the restaurant as a corporation but taxed at the individual level, they have two options to do so. One option is to form an S-Corporation and the other option is to form a Limited Liability Company (LLC).

S-Corporation allows the company to avoid the ‘double-taxation’ issue faced by C-Corporations. The income of the restaurant as an S-Corporation will pass on to the owners. In addition, the owners will have a limited liability and can only lose the amount invested in the restaurant company (Bizfilings). If a restaurant is formed as an S-Corporation, the owners will also be able to write-off expenses and losses in the restaurant against their income, thus, bringing down their income tax expense. Another benefit of the restaurant as an S-Corporation will be that it will continue to operate even beyond the lives of the founding owners (Zahorsky, Should Your Small Business Become an S Corporation?).

A restaurant as a LLC will also allow the owners to pay tax on the restaurant’s income at personal tax rate because the profits will be passed directly to the owners instead of being taxed at the corporate level (NOLO). In addition, the owners even have flexibility in choosing the tax treatment (Bizfilings). LLC, just like S-Corporations, also impose limited liability on the owners (Zahorsky, Limited Liability Company 101) which means the restaurant owners will not lose any more than investment in the restaurant should the business default on its debt obligations.

A9. As a limited partner, I will not be able to play any role in management or financial decisions because limited partners are legally prohibited from serving in the management or operating roles (Farlex, Inc.). This makes sense because limited partners do not have unlimited liability, unlike general partners, thus, it is only fair that limited liability comes with limited saying in the strategic direction of the company. Moreover, limited partners do get their share in the company’s profits before general partners (Farlex, Inc.) which does offer them some protection against inefficient management of the partnership by general partners.

References

Bizfilings. (n.d.). S Corporation vs. C Corporation: A Comparison. Retrieved September 22, 2012, from http://www.bizfilings.com/learn/s-corporation-vs-c-corporation.aspx

Coollawyer.com. (n.d.). Gp,LP or Partnership. Retrieved September 22, 2012, from http://www.coollawyer.com/webfront/bizfilings/partnership.php

Farlex, Inc. (n.d.). Limited Partnership. Retrieved September 22, 2012, from http://legal-dictionary.thefreedictionary.com/limited+partnership

Mintz, R. J. (n.d.). General Partnership. Retrieved September 22, 2012, from http://www.rjmintz.com/family-limited-partnership/partnership-types/general-partnerships/

NOLO. (n.d.). How LLCs Are Taxed. Retrieved September 22, 2012, from http://www.nolo.com/legal-encyclopedia/how-llcs-are-taxed-29675.html

Zahorsky, D. (n.d.). Limited Liability Company 101. Retrieved September 22, 2012, from http://sbinformation.about.com/cs/ownership1/a/LLC.htm

Zahorsky, D. (n.d.). Should Your Small Business Become an S Corporation? Retrieved September 22, 2012, from http://sbinformation.about.com/od/ownership1/a/SCorporation.htm

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