Partnerships demand that all partners (both general and limited partners) be on the same page financially and within the scope of the business operations. They require shared a goal and vision for the entity, and a mutual understanding of each owner's role and the parameters for exerting control. Perpetual lines of communication must be available for all parties in response to changing dynamics and the occurrence of unforeseen events. This is particular relevant in the restaurant industry, where consumers have many choices and often make them based on little substance
. The restaurant industry is fraught with sudden changes, which can require added attention, effort and capital in a short period of time. Therefore, a thorough understanding of the roles of each owner, be they a general or limited partner, is essential to a properly functioning partnership.
Additionally, effective partnerships require regular meetings and reviews of all business operations, and a careful understanding of profits and losses. The profits and rewards of the business have to be clearly defined and real to each member; the losses have to be well-reasoned and explicable
. Both must be allocated fairly in accordance with the business plan established prior to setting up the partnership. In other words, individual partners should not reap artificial rewards or suffer disproportionate losses without the complete understanding of all ownership parties. Finally, there should be concrete and clearly defined period of time for all expectations relating to the realization of profit and the expectations of the partners. Performance and time frame matters should be addressed regularly in meetings and reviews conducted within the framework of the potentially fast-changing business. It is recommended that all of this be written down in advance in the form of an agreement that details every aspect of the business. This agreement should be signed by every party and considered a legally binding document. These steps enhance the likelihood that the partnership will survive the tumultuous climate that prevails in the restaurant industry.
The corporation is distinguished by its treatment as a separate entity from stakeholders and owners for tax purposes. The corporation itself pays taxes on profits, as opposed to the individual investors. Essentially, the corporation facilitates the collection of capital from individual owners for the purpose of entering into a business venture. Corporations provide the benefit of easy and open transfer of ownership. Also, the lifespan of a corporation is perpetual, rather than lasting until the death or illness of a sole proprietor or all of the relevant partners. This is because the corporation exists as a solitary, legal and independent enterprise, with the power to carry assets or liabilities on its own
Importantly, corporations offer the advantage of limiting asset liability to the amount of the individual capital investment, as opposed to the full liability in a proprietorship or partnership
. Because this is true, individual minority owners have limited power in controlling the day-to-day business operations. The majority of stakeholders typically determine the course of the business. However, management structure of the enterprise can fundamentally change without altering the structure of the corporation. Also, the credit resources of the owners can be limited due to the limits placed on liability. On the other hand, the larger number of participating owners typical for a corporation can imply easier means for generating capital, when the need for capital arises. One final advantage of incorporation is the fact that corporate tax rates tend to be lower than individual rates.
However, corporations have several disadvantages, including the difficult and time-consuming nature of creating one. This is largely because of the many state and federal requirements that owners must fulfill. Also, state boundaries often prevail, leading to additional requirements for businesses wishing to conduct business operations across state lines. Corporations require that an Articles of Incorporation be documented and registered with state and federal authorities. The Articles must include the rules and bylaws of the corporation, and filing fees must be paid in accordance with registration guidelines. Additionally, stock certificates must often be issued for public corporations, which requires additional bookkeeping and accounting personnel. Finally, typical corporate structures do not provide the benefit of shielding income from taxation at the corporate and personal levels.
However, alternative corporate structures exist that do shield stakeholders from double taxation, including companies preferring to be taxed under Subchapters of the Tax Code (or S Corp). An S Corp offers the advantage of allowing income to be taxed only at the shareholder level, so that corporate revenues are not collectively taxed. S Corps have restrictions relating to the number of permissible shareholders and the ownership of subsidiary companies. However, these regulations are rarely applicable in the case of restaurants, except in the case of very large, multi-national corporations. S Corps are therefore preferable to standards forms of corporate ownership in most cases with respect to the restaurant industry. However, they lack the flexibility of limited liability companies.
An LLC essentially combines the structures of a corporation with that of a partnership. It protects stakeholders from the liability of personal assets, while also offering the tax benefits inherent in a partnership. Specifically, this refers to the advantage of having income taxed only at the personal level. In other words, the LLC bears no obligation to pay federal income taxes
. Members of an LLC can deduct their business expenses on their personal taxes with respect to their share of the entity's debts. Also, the requirement of holding regular meetings or issuing stock certificates is obsolete. Once the enterprise's agreement is established and registered, there are very few obligations, which typically benefits operating members and minority stakeholders alike. Operations can be designated to specific LLC members or to independently hired managers without the need to restructure the company. Finally, the LLC offers the advantage of allowing dividends to be spread unequally across the various members
Corporations require that profits be spread equally. This allows resources to be allocated based on the needs of the members. These circumstances pose many benefits to owners in the restaurant industry, and so they have grown in popularity over the previous ten years.
Ultimately, the LLC is the most likely platform for success in the restaurant industry, because it most effectively takes advantages of the tax code while effectively distributing risk across many investors. It allows the cumulative resources of many entrepreneurs carry enough weight to frequently let the merit of the entity determine success or failure. It reduces the potential need to assume business loans that can hamper the entity down the line. It frequently places the financial burden on paying down a mortgage over the course of 15 to 30 years; or it places the challenge squarely on meeting the terms of a lease as a part of fixed business costs. Either way, it is the structure that most capably curbs the arbitrary and capricious nature of the restaurant industry. Among the various business structures available to the restaurant entrepreneur, the LLC most frequently returns the power of self-determination back in the hands of the ownership group, which is how most entrepreneurs wish to be judged.
The best business structure for a restaurant depends on a variety of factors, and must be determined on a case-by-case basis. While the LLC offers the most benefits to the most forms of ownership groups, it is inaccurate to say by default that it is the most attractive structure. LLCs and corporations carry with them the responsibility of effective management of operations to be delegated to the appropriate member or members. These individuals are legally bound to act in the interest of their fellow members in the name of loyalty, fairness and duty
. This requires a very thorough understanding of the legal aspects of the duties of directors, a meticulous record of all business activity and open lines of communication among members. These dynamics are not possible in every situation, and are reasons why the LLC and corporation are not the ideal structures in the case of each entity.
Effective LLCs and corporations are operated in situations in which every member is clear regarding his or her role (in terms of finance and effort). Each investor also must be clear on the role of every other member, and this must be perpetuated in the form of clearly composed agreements and open and continual lines of communication. The day-to-day operations must be in the hands of competent directors who are clear regarding their obligations to the other members. In the future, it is likely that the LLC structure will continue to grow in popularity throughout the restaurant industry in light of its increasingly competitive nature and the financial challenges that our country faces. However, it is worth remembering that partnerships and proprietorships can provide the most facile path to success for some operators.
Partnerships in the restaurant industry require individuals who are comfortable delaying rewards over the long haul, and who have…