Tax Questions Answered January 2006

RH Staff

We are opening a second location this year and do not know what business entity to use for this location. The first location is an LLC with three individual owners. The second location will have the same three owners. I was told that we should open the second location under a separate entity for legal purposes. What do you think?

While I am not a lawyer and do not give legal advice, I believe that most attorneys would suggest that a separate legal entity would give you better asset protection for each restaurant. As such, a separate LLC for the second location would probably work the best. However, I would suggest you reorganize the structure as follows.

Set up a holding company LLC (Holding LLC) owned by the same three individuals. The owners should reorganize the structure of the first location (First Restaurant LLC), whereby Holding LLC will own 100% of First Restaurant LLC. For legal purposes, First Restaurant LLC will be a separate entity, but for tax purposes the company will be a "Disregarded Entity" and will file its information as part of Holding LLC's return.

Holding LLC should be the entity that owns 100% of the second location ("Second Restaurant LLC"), and this entity will be a separate legal entity, but disregarded for tax purposes.

There are many tax benefits of having this structure when opening a second location. One of the benefits for a restaurant is the immediate write off of preopening costs, organization costs, smallwares and more incurred by location two that as a separate tax entity would have been required to be amortized under the IRS code over 15 years.

A couple of other benefits of using a disregarded LLC ownership structure are that (1) you have ability to avoid short year depreciation on the new location and (2) there exists the potential to avoid tax basis limitations if location two has an operating loss.

Please be aware that there are many ways to structure the ownership of your restaurant locations using C corporations, S corporations and LLCs. While the structure described above is one that I have used on many occasions, without knowing all the facts of your organization I cannot say whether this structure will be best for you. I recommend that you consult with a tax advisor and/or attorney.

Adam M. Berebitsky, CPA, is Director of Tax for SS&G Restaurant Services Group, a subsidiary of SS&G Financial Services, Inc. Reach him at (800) 869-1834, or [email protected]