Restaurants Organized as Corporations
Large restaurants that want to operate in several states or be offered for public trade on the stock market will often organize as corporations. A corporation is a legal entity that is separate from its shareholders. This separation limits the personal liability of the owners. This means that the shareholders’ personal assets cannot be seized to pay the debts of the business; they are only liable for the amount of money they invest into the corporation.
The two basic corporate structures are C corps. and S corps. Each type has its own benefits and drawbacks.
The most common corporate structure is the C corporation (also called Regular Corporation or C corp.). C corps. have shareholders and a board of directors, and they hold regular meetings to determine the future of the business.
- Benefits: C corps. can have an unlimited number of shareholders. This makes the structure especially suitable for the stock exchange because the more owners you have, the more money you have available for operations. Also, fringe benefits paid to corporate officers are deductible on the corporate tax return.
- Drawbacks: Since C corps. are more complicated than partnerships and sole proprietorships, they are more expensive and time-consuming to form. With the complexity comes more paperwork that can at times become overwhelming. C corps. are also subject to double taxation. This means that the profits of the company are taxed at the corporate level as a whole, and the individual shareholders will have to pay taxes again when they report any earnings on their individual tax returns.
- Tax Forms: As stated before, C corps. come with a lot of red tape. One source of the piles of paperwork is the IRS. One of the first places to start researching should be at the IRS’s page on corporate tax forms, so you can see some of the documents involved. Visit the IRS site on C corporations
An S corporation (or S corp.) is very similar to a C corp. but with a few important differences. The main differences are that profits are not taxed twice and there is a limit to the number of shareholders.
- Benefits: An S corp. is taxed like a sole proprietorship or partnership; this means that profits are only taxed at the shareholder level, as opposed to C corps. which are taxed at the corporate and shareholder levels. This means the shareholders can gain more profit. Another benefit of S corps. is that the shareholders are only liable for the amount of money they invest into the business, so their personal assets cannot be used as collateral in paying down debt.
- Drawbacks: S corps. do have a few drawbacks. The corporation can only have a limited number of shareholders, so the business cannot simply sell more stock to more people if they need more money. Also, shareholders can only receive profits equal to their stake in the company, meaning if you own 25% of an S corp., you can only receive 25% of the profits. Fringe benefits are limited for S corps., too.
- Tax Forms: S corps. also have to file certain forms with the IRS in order to gain the tax benefits. Go to the IRS website on S corporations to download the appropriate forms. Visit the IRS site on S corporations
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