Evaluating Hospitality Business Structures

Different forms of business ownership—or business structures—come with different benefits, requirements, and limitations. The specific details of your hospitality business ownership and organizational plan should inform the decision of which formal business structure will provide the best foundation and allow your business to grow and thrive.

The primary hospitality business structures fall into the following categories:

• Sole proprietorships;
• Partnerships;
• Limited Liability Companies (LLCs); and
• Corporations

Choosing between Hospitality Business Structures

To choose a hospitality business structure that will serve the business well in the long term, you must be able to outline the current and future needs and goals of the business. When you meet with your hospitality attorney to discuss the different forms of business ownership and structure, being prepared to answer questions and discuss specific details about your business plan will allow for maximum productivity.

Factors to consider when determining the appropriate structure for hospitality business ownership and organization include the following:

• The current and anticipated size of the business;
• The need for liability protection for the business and its owners;
• The operational structure of the business;
• Tax considerations;
• The purpose of the business;
• The long-term business plan, including the owners’ wishes for growth, expansion, funding, and more;
• Local (state and municipal) regulations and requirements for permitting, licensure, etc.;
• The owners’ availability and capacity for managing administrative matters; and
• The costs associated with each of the hospitality business structures under consideration

By taking all of these factors into consideration and consulting with an experienced hospitality attorney before committing to one of the specific forms of business ownership, you can avoid problems, unnecessary expense, and limitations on growth and opportunities in the future.

Hospitality Business Ownership Options: The Sole Proprietorship

Of the forms of business ownership available, the sole proprietorship is the simplest and, typically, least expensive to establish. This structure requires less paperwork, in part because it does not create a separate business entity independent from the owner. The profits and debts of a sole proprietorship are included in the owner’s personal income taxes.

While this option gives the owner maximum control over the business, it also presents the greatest risk in liability. The assets and debts of a sole proprietor and his or her business are intertwined, leaving the owner’s personal finances and property at risk should the company accrue substantial liabilities or be sued or otherwise threatened. The nature of the hospitality industry—regularly serving and interacting with the public—makes the issue of liability a central concern for anyone considering hospitality business ownership.

While a sole proprietorship can be a good fit for a small business with minimal risk or a starting point for someone dabbling in hospitality business ownership, this structure has significant limitations. In addition to the liability risks mentioned above, sole proprietors may find it more difficult to raise funds to support and grow the business because the sale of stock is not an option and banks may be hesitant to loan money to these types of businesses.

Hospitality Industry Partnerships

Partnerships are the simplest form of business ownership for multiple people who wish to own a business together. Hospitality industry partnerships can take several forms:

• General partnership;
• Limited partnership (LP); or
• Limited liability partnership (LLP)

A general partnership is the simplest and least formal of the three forms of business ownership in the partnership category. General partners typically retain equal control over the business and also assume equal and full personal liability.

In a limited partnership, one owner (the general partner) has more control and takes responsibility for the management of the business. This person, the general owner, assumes unlimited liability. One or more additional owners have more limited liability but also typically maintain less control. Profits and debts in partnerships are applied to the taxes of all named owners. However, the general partner may also be required to pay self-employment taxes.

A limited liability partnership provides legal liability protection for all of the owners of a business. Each owner can be held liable for the company’s debts only up to the amount he or she invested in the business. Profits and losses are reported on the owners’ personal income taxes, and each partner must pay self-employment taxes, which include withholding for Social Security and Medicare.

In hospitality industry partnerships, it is important to draft a partnership agreement that outlines the expectations and responsibilities of the partnership. If no written agreement is executed, or the partnership agreement is incomplete or unclear, resolving the issues that inevitably arise in a business can be difficult, may be governed by rules the partners did not anticipate, and might require litigation.

Common Forms of Business Ownership: The LLC

The limited liability company (LLC) is a common choice for business owners, including those in the hospitality industry. For many businesses, an LLC can provide the most cost effective liability protection.

Forming an LLC creates a new business entity and provides separation of the company’s assets and debts from those of the owner or owners. Unlike a sole proprietorship or partnership, an LLC can be owned by a single person or entity or multiple owners—called members—in most states. Since the requirements for forming and operating an LLC vary by state, it is critical that members of LLCs and their advisors are educated in state laws and requirements.

LLCs offer a beneficial flexibility in the area of tax treatment. Members can elect to have the company taxed as a corporation or to have income and debts pass through to the owners’ personal taxes.

The general flexibility of the LLC business structure, along with the liability protection it provides for hospitality business owners, make it a good choice for many small- and medium-sized businesses in the hospitality industry, like restaurants or independently run lodging companies.

More Complex Hospitality Business Structures: Corporations

The majority of large corporations, including many businesses in the hotel and lodging sector, are C corporations (C corps). This structure offers the most liability protection for owners and employees and can provide greater flexibility than an LLC might in terms of changes in ownership. C corps can also sell stock to raise funds for operations and growth of the business.

C corporations are held to a higher standard for reporting and record-keeping and are a more labor- and time-intensive, costly form of business ownership. As a separate entity from the business’s owners, C corps pay corporate taxes. Shareholders in these corporations might also have to pay personal income taxes on dividends received from the company, creating a situation of double taxation.

Sub-chapter S of the Internal Revenue Service (IRS) Code provides an option to avoid this double taxation. S corporations (S corps) can pass some profits and losses to the personal income taxes of the owners, removing those funds from the corporation’s tax burden. State laws vary on the treatment of and requirements placed on S corps, so it is vital to consult with a knowledgeable hospitality attorney who can evaluate your specific situation and advise your company accordingly.

Contact a Hospitality Attorney to Discuss Hospitality Business Structures

It is possible that none of the forms of business ownership discussed here are perfect for your business. For example, if your company offers a substantial benefit to the public, you may be eligible for classification as a benefit corporation or a certified B corporation. Your company might even qualify as a nonprofit organization if the primary purpose of your operation is to benefit the public. Cooperatives—a structure often used by farmers markets and other agricultural businesses—can be beneficial to groups pooling resources for the greater benefit of all members.

When it comes to hospitality business structures, your choice will impact practically every area of your company. Putting in the effort to thoroughly evaluate on the front-end will likely save you time and potential roadblocks down the road. The best way to ensure you have truly vetted your options is to consult with a hospitality attorney with deep knowledge of the industry and an understanding of the various types of hospitality business ownership. Jenkins Fenstermaker, PLLC has the experience and knowledge business owners need. Schedule a consultation with the firm today by calling (304) 523-2100 or completing the firm’s online contact form.