Hospitality Business Structures

Organizational Structure – The legal entity that owns a business

Operational Structure – The relationship between a business’s ownership and its management

External v. Internal Relationships

 

Factors to Consider in Determining Business Structure

 

▪ Ease of formation and maintenance

▪ Liability

▪ Taxation

▪ Transfer of ownership

 

Common Hospitality Organizational Structures

 

  • Sole Proprietorship

  • General Partnership

  • Limited Partnership (LLP)

  • C Corporation

  • S Corporation

  • Limited Liability Company LLC

 

 Sole Proprietorship

  • A business organization in which one person owns and, often, operates the business.

 

 General Partnership

  • A business organization in which two or more owners agree to share the profits of the business but are also jointly liable for its debts.

 

Limited Liability Partnership (LLP)

  • A business organization with two classes of owners. The limited partner(s) invests in the business, but may not exercise control over its operation, in return for protection from liability.

  • The general or managing partner(s) assumes full control of the business operation and can also be held liable for any debts the operation incurs

 

Limited Partner

  • The entity or person in a limited partnership relationship who is liable only to the extent of his or her investment.

  • Limited partners have no right to manage the partnership.

 

General (or managing) Partner

  • The entity or person in a limited partnership relationship who makes the management decisions and can be held responsible for all debts and legal claims against the business.

 

Corporation

  • A group of individuals granted a charter, legally recognizing them as a separate entity with rights and liabilities distinct from those of its individual owners (Also knows as a C corporation)

 

Dividends

  • A portion of profits received by a shareholder usually in relation to his or her ownership (shares) of a corporation

 

S Corporation

  • A type of business entity that offers liability protection to its owners and is exempt from corporate taxation on its profits. Various restrictions limit the circumstances under which an S corporation can be formed.

 

Limited Liability Company (LLC)

  • A type of business organization that protects the owners from liability for debts incurred by the business without the need for some of the formal incorporation requirements.

  • The federal government does not tax the profits of LLC’s; however, some states do tax the profits, but others do not.

 

Common Hospitality Operating Structures

 

  • Owner-Operator

  • Franchise

  • Management Contracts

  • Shared Services

 

Owner-operator

  • A type of operating structure in which the owners of a business are directly responsible for its day-to-day operation.

  • May be referred to as an “independent.”

 

 

Advantages

  • No required educational requirements

  • Make your own decisions

  • Establish your own policies & procedures

 

Disadvantages

  • You carry all the responsibilities

  • You are the main investor

  • You are subject to all liabilities (depending on the entity type)

  • Little, if any, public recognition

  • Reduced purchasing power

  • Lack of operational support

 

 Franchise

A contract between a parent company (franchisor) and an operating company (franchisee) to allow the franchisee to run a business with the brand name of the parent company, as long as the contract concerning methods of operation are followed

 

 

Franchisee

The person or business that has purchased and/or received a franchise.

Franchisor

The person or business that has sold and/or granted a franchise.

 

Management contract

The legal agreement that defines the responsibility of a business owner and the management company chosen to operate the owner’s business

 

Shared Services

The term used to refer to a sharing economy

  • Airbnb

  • VRBO (Vacation Rental by Owner)

 

 

The Agency Relationship

 

Respondent Superior

  • Literally – “Let the master respond”

  • A legal theory that holds the employer (master) responsible for the acts of the employee

 

Principal

  • Employer, the person hiring and directing employees (agents) to perform his, her or its business.

 

Agent

  • A person authorized to act for or to represent another, usually referred to as the principal.

 

Fiduciary responsibility

  • The requirement that agents act in the best interest of their principals.

 

Independent Contractor

  • A person or entity that contracts with another to perform a particular task, but whose work is not directed or controlled by the hiring party.