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Lev
Lev, Tax Advisor
Category: Tax
Satisfied Customers: 22828
Experience:  Taxes, Immigration, Labor Relations
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A, B, C are the owners of a restaurant and want to open another

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A, B, C are the owners of a restaurant and want to open another 10 restaurants of the same chain, they will ask for 50% of the monthly gains for each restaurant, what is the best organization structure for this. Having A, B and C form a C Corporation and then have the 10 restaurants as S Corporations, LLC's or joint Venture's?, The best for A, B, C is to receive a K1 of all the gains that they will be receiving from the 10 other restaurants?, and of course they will be paying their taxes on their portion. Is this the best organization structure for this case?, do you have a better idea?.
Submitted: 1 year ago.
Category: Tax
Expert:  Lev replied 1 year ago.

LEV :

Hi and welcome to Just Answer!
based on your information - A, B, C are partners - and they are running business as a partnership.



A partnership is the relationship existing between two or more persons who join to carry on a trade or business. Each person contributes money, property, labor or skill, and expects to share in the profits and losses of the business.


A partnership must file an annual information return to report the income, deductions, gains, losses, etc., from its operations, but it does not pay income tax. Instead, it "passes through" any profits or losses to its partners. Each partner includes his or her share of the partnership's income or loss on his or her tax return.


Some additional information about partnerships may be found in IRS Publication 541 - http://www.irs.gov/publications/p541/index.html


Then - each partner reports pro-rata share of income on his/her individual tax return.


LEV :

You may have the LLC with several member - and that LLC will be treated as partnership - so that would be no difference from income tax prospective.
However - having 10 LLC would trigger some extra overhead for filing 10 partnership tax returns. Unless there is specific purpose - I do not thin that would be reasonable - and will not affect the tax liability of partners.

LEV :

In some situations - you might want to have several business entities. For instance - if restaurants are operating in two different states - you might want to have two separate LLC registered in each state.

Customer:

Is there something like forming the Main Corporation (C?) and then have the 10 restaurants as LLC's reporting to the Main Corporation?

Customer:

Each restaurant will be operated by manager (who will also share the profits with the owners, but the owner will not be in each restaurant, just acting as trainers and consltants)

Customer:

There will be operating only in california

Customer:

So A, B, and C could be a LLC, C or S corporation? and then have the 10 restaurants also as LLC, C, or S? submitting partnership returns to A,B and C?

LEV :

Having the LLC treated as a partnership is a good starting point. If you want to choose the LLC to be treated as a corporation - you may make such selection at any time in the future.
You definitely may have a more complex structure - as you suggested - a holding corporation (or a partnership) which will own other business structures. However - that will add an overhead for filing multiple tax returns and generally will not affect overall tax liability.
You might want such structure for other purposes - for instance - if you plan to sell any specific restaurant - it might be better to have it in a separate business structure which would be simply liquidated. However without any specific purpose having a complex structure is not advisable.

LEV :

If you are not certain which business structure to use - the best would be to register the LLC.
A Limited Liability Company (LLC) is a business structure allowed by state statute.
Depending on elections made by the LLC and the number of members, the IRS will treat an LLC differently. Specifically, a domestic LLC with at least two members is classified as a partnership for federal income tax purposes unless it files Form 8832 and affirmatively elects to be treated as a corporation.
So - with NO election - the LLC will be treated as a partnership. You may elect it to be treated as a corporation - and may make such election at any time.
Thus you may start the LLC as a partnership - and when the business will take off - you may choose the LLC to be treated as S-corporation or C-corporation.
If you want most of the profit to be reinvested into the business - C-corporation would be the best structure. However - if most profit will be distributed to owners - S-corporation could be the best.
If you are not certain - just do not make any election now - and postpone your choice.

Customer:

why S corporation is the best for distribuiting profit and why C is better for the structure?

Customer:

and what about joint venture?, is like partnership too?

LEV :

why S corporation is the best for distributing profit and why C is better for the structure?
S-corporations are pass through entities.
With S-corporation - owners are generally in two roles - employees and shareholders.
As employees they received wages - subject of income and employment taxes - partly paid by employees via withholding and partly by the employer - S-corporation.
As shareholders - persons are responsible for their share of S-corporation income which is passed to them on K1 - that part of income is NOT subject of employment taxes and is not subject of self-employment taxes as it would be in case of the partnership. That is the S-corporation might be more advantageous compare to the partnership - but only if the profit large enough to cover additional overhead for filing employment tax returns.
C-corporation is a separate taxing entity (not pass through) - it pays its own income taxes.
Similarly - owners might be employees and shareholders.
However dividends distributed to shareholders is taxed twice - on the corporate level - and then for each shareholder. So if most of the profit is distributed - you might pay more taxes. But if most of the profit is used for business purposes - for instance to open additional restaurants - only corporate income tax are due.

Customer:

So then if they want open additional restaurants but also get some profit the best advise will be LLC, right? or C if they only want to open more restaurants.

LEV :

what about joint venture?, is like partnership too?
yes - it is a partnership - but generally the term "joint venture" is used to describe a short term partnership. For instance - a restaurant forms a joint venture with a car service to provide discounts for either customers
In additional - the IRS defines a “qualified joint venture,” whose only members are a husband and a wife filing a joint return, can elect not to be treated as a partnership for Federal tax purposes.
See more information here - http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Election-for-Husband-and-Wife-Unincorporated-Businesses

Customer:

So then how a Corporation as a holder for all the 10 restaurants would work? Corporation and all 10 restaurants as LLC's?

LEV :

So then if they want open additional restaurants but also get some profit the best advise will be LLC, right? or C if they only want to open more restaurants.
If you are not sure how the business will go - and that is very common at the starting point - starting the LLC is the best first step.
You are not required to register specifically the corporation. You may have the LLC and choose it to be treated as C-corporation now or later. Having the LLC would be more flexible.
Another issue - you might not have any profit for first year-two - in this case your LLC will be simply a partnership without any selection.

LEV :

So then how a Corporation as a holder for all the 10 restaurants would work? Corporation and all 10 restaurants as LLC's?
You may have a corporation that owns all restaurants - you may have separate accounting - but for tax purposes - that will be ONE entity - and you will file ONE tax return.
You may have a separate business entity for each restaurant. However - because you are in California - each LLC will pay at least $800 every year regardless if it has any profit. So unless you have other reasons of having multiple entities - it doesn't seem reasonable.

Customer:

So they can have a C Corporation and have all the money coming from profits of the restaurants to be invested in open more restaurants, and if they are part of the LLC of each restaurant they can have from there a distribution of their profit.

Customer:

or they can have each restaurant as a LLC and have a k-1 for each one, and then decide what to do with their profits, invest to open more restaurants or for them as a profit

LEV :

You may have ANY business structure you want - that is not an issue.

Customer:

ok, great, I appreciate your quick response and yes you gave me a good explanation for what I was looking for, thank you very much and have a great day!!

Lev, Tax Advisor
Category: Tax
Satisfied Customers: 22828
Experience: Taxes, Immigration, Labor Relations
Lev and 3 other Tax Specialists are ready to help you

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