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APR 07, 2016

Factors to Consider When Choosing the Best Corporate Entity For Your Hospitality Business: Liability for New York Sales and Use Tax Debt.

Several considerations need to be taken into account when choosing a corporate entity when preparing the opening of a restaurant or hotel. A limited liability company is usually the preferred choice because of it ability to provide flexible corporate structure and the associated tax advantages (i.e., tax liability is passed through each single member). LLC also provide the added benefit of allowing all members of an LLC to be directly involved in the management of the restaurant’s or hotel’s operations.

For certain types of investors, however, a corporation, although more structured and less flexible than an LLC, is the better choice.

For instance, under Section 1133 of the Sales Tax Law, will hold each member of an LLC, even passive members personally liable for sales tax liability. For an LLC member holding a 50% or more of the ownership interest in an LLC, or member that is entitled to 50% or more of the profits or losses of the LLC, the member will be joint and severally liable for the entire share of the sales tax liability. If the LLC member can document that its ownership interest and percentage distributive share of the profits and losses is less than 50%, that member will be liable for its percentage of ownership interest in the business. For example, if a member holds a 5% membership interest in an LLC and the LLC is assessed a $1,000 sales and use tax liability, then the 5% member will be responsible for $50 of the sales and use tax liability.

On the other hand, shareholders of a corporation are not automatically liable for sales and use tax liability by virtue of their equity ownership in a corporation. In a corporation, only the authorized officer or employee (e.g. the employee or officer authorized to sign the corporate tax returns) will be responsible for unpaid sales and use tax.  


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