You and two of your college classmates have discussed plans to open a restaurant
ID: 442715 • Letter: Y
Question
You and two of your college classmates have discussed plans to open a restaurant. You intend to attract college age students who are health and fitness minded to your restaurant. You and your co-owners have agreed to invest equally in terms of money and time. However, in addition to contributions made by each of you, you need another $700,000 for the restaurant to succeed.
What type of organization is best suited for the business activity? LLC/LLP?
Who will manage the restaurant when you and your co-owners are not present?
What liabilities do you and your co-owners face?
Explanation / Answer
Forming a Limited Liability Corporation (LLC) will be best suited for the business. As LLC is a private corporation, a private investor can be included for arranging the remaining $700000 for the restaurant to succeed. A limited liability company (LLC) also has certain tax advantages. The business itself is not responsible for taxes on its profits. Instead, the LLC's owners, known as "members," report their share of business profit and loss on their personal tax returns, similar to tax reporting for a general partnership. This is known as "pass-through" taxation.
The owners of most small LLCs participate equally in the management of their business. This arrangement is called "member management." There is an alternative management structure -- somewhat awkwardly called "manager management" -- in which you designate one or more owners (or even an outsider) to take responsibility for managing the LLC. The nonmanaging owners (sometimes family members who have invested in the company) simply sit back and share in LLC profits.
Like shareholders of a corporation, all LLC owners are protected from personal liability for business debts and claims. This means that if the business itself can't pay a creditor -- such as a supplier, a lender, or a landlord -- the creditor cannot legally come after an LLC member's house, car, or other personal possessions. Because only LLC assets are used to pay off business debts, LLC owners stand to lose only the money that they've invested in the LLC. This feature is often called "limited liability."
Unlike a corporation, an LLC is not considered separate from its owners for tax purposes. Instead, it is what the IRS calls a "pass-through entity," like a partnership or sole proprietorship. This means that business income passes through the business to the LLC members, who report their share of profits -- or losses -- on their individual income tax returns. Each LLC member must make quarterly estimated tax payments to the IRS.
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