Chapter 3 HospitalityBusinessStructures. © 2012 Stephen C. Barth P.C. and John Wiley & Sons, Inc....

Chapter 3Chapter 3

HospitalityHospitality

BusinessBusiness

StructuresStructures

© 2012 Stephen C. Barth P.C. and John Wiley & Sons, Inc.All Rights Reserved

Hospitality Business StructuresHospitality Business Structures

The Importance of Business StructureThe Importance of Business Structure Common Hospitality Organizational Common Hospitality Organizational

StructuresStructures Common Hospitality Operational Common Hospitality Operational

StructuresStructures The Agency RelationshipThe Agency Relationship

• The Master-Servant Relationship• The Agent-Principal Relationship• The Independent Contractor


In This Chapter, You Will Learn:In This Chapter, You Will Learn:

1.1. The importance of selecting the proper The importance of selecting the proper organizational and operational structures organizational and operational structures for a hospitality business.for a hospitality business.

2.2. The various organizational business The various organizational business structures used in the hospitality industry.structures used in the hospitality industry.

3.3. The most common operational business The most common operational business structures used in the hospitality industry.structures used in the hospitality industry.

4.4. The responsibilities and obligations The responsibilities and obligations created by an agency relationship.created by an agency relationship.


The Importance of Business The Importance of Business StructureStructure

Ease of formation and maintenanceEase of formation and maintenance LiabilityLiability TaxationTaxation Terminating or selling the businessTerminating or selling the business



Legalese:Legalese:

Organizational StructureOrganizational Structure – The legal – The legal entity entity that owns a businessthat owns a business



Legalese:Legalese:

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


Common Hospitality Common Hospitality Organizational StructuresOrganizational Structures

Sole proprietorshipSole proprietorship General partnershipGeneral partnership Limited partnership (LP)Limited partnership (LP) C corporationC corporation S corporationS corporation Limited liability company (LLC)Limited liability company (LLC)



Legalese:Legalese:

Sole Proprietorship Sole Proprietorship -A business -A business organization in which one person organization in which one person owns owns and, often, operates the and, often, operates the business.business.



Legalese:Legalese:

General Partnership General Partnership - A business - A business organization in which two or more organization in which two or more owners agree to share the profits of owners agree to share the profits of

the business, but are also jointly the business, but are also jointly and and severally liable for its debts.severally liable for its debts.



Legalese:Legalese:

Limited Partnership Limited Partnership - A business - A business organization organization with two classes of owners. with two classes of owners. The limited The limited partner invests in the partner invests in the business, but may not business, but may not exercise control exercise control over its operation, in return over its operation, in return for for protection from liability. The general or protection from liability. The general or

managing partner assumes full managing partner assumes full control of the control of the business operation, but can business operation, but can also be held also be held liable for any debts the liable for any debts the operation incurs.operation incurs.



Legalese:Legalese:

Limited Partner Limited Partner -The entity in a -The entity in a limited limited partnership relationship who partnership relationship who is liable is liable only to the extent of his or only to the extent of his or her her investment. Limited partners investment. Limited partners have no have no right to manage the right to manage the partnership. partnership.



Legalese:Legalese:

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


Analyze the Situation 3.1Analyze the Situation 3.1

Nicholas Kostanty formed a limited Nicholas Kostanty formed a limited partnership with his father-in-law, Ray partnership with his father-in-law, Ray Sweeney, to open an upscale French Sweeney, to open an upscale French restaurant in a midwestern town. Mr. restaurant in a midwestern town. Mr. Kostanty was the general partner and Kostanty was the general partner and owned 75 percent of the business. Mr. owned 75 percent of the business. Mr. Sweeney, with 25 percent ownership, was Sweeney, with 25 percent ownership, was the limited partner and invested $100,000. the limited partner and invested $100,000. After one year, difficulties in the After one year, difficulties in the restaurant's operation caused business to restaurant's operation caused business to drop off, and Mr. Kostanty called Mr. drop off, and Mr. Kostanty called Mr. Sweeney for advice.Sweeney for advice.



After hearing of the difficulties, and After hearing of the difficulties, and concerned with the security of his concerned with the security of his investment, Mr. Sweeney traveled from investment, Mr. Sweeney traveled from Arizona to Indiana to visit the operation. Arizona to Indiana to visit the operation. Upon observing the operation for two Upon observing the operation for two days, the two partners decided to launch a days, the two partners decided to launch a large and expensive television ad large and expensive television ad campaign to increase flagging sales. Mr. campaign to increase flagging sales. Mr. Sweeney designed the campaign with the Sweeney designed the campaign with the help of Seelhoff Advertising and Video, a help of Seelhoff Advertising and Video, a local advertising agency specializing in local advertising agency specializing in television commercials.television commercials.



Despite an immediate increase in Despite an immediate increase in sales, volume continued to decline, and sales, volume continued to decline, and finally, three months after the ad finally, three months after the ad campaign was launched, the restaurant campaign was launched, the restaurant closed its doors. Total debts at the time closed its doors. Total debts at the time the restaurant closed equaled the restaurant closed equaled $400,000, with assets of the partnership $400,000, with assets of the partnership only being $200,000. Included in the only being $200,000. Included in the debt was $150,000 owed to the debt was $150,000 owed to the advertising agency. The agency sought advertising agency. The agency sought payment directly from Mr. Sweeney. payment directly from Mr. Sweeney.



Mr. Sweeney claimed that his Mr. Sweeney claimed that his liability was limited to the liability was limited to the $100,000 he had previously $100,000 he had previously invested in the business, and invested in the business, and refused to pay any additional refused to pay any additional money. The Seelhoff Advertising money. The Seelhoff Advertising Agency sued the limited Agency sued the limited partnership, as well as Nicholas partnership, as well as Nicholas Kostanty and Ray Sweeney Kostanty and Ray Sweeney individually. individually.



1.1. By hiring the advertising agency, By hiring the advertising agency, did Mr. Sweeney forfeit his limited did Mr. Sweeney forfeit his limited partner status? partner status?

2.2. Is Mr. Sweeney liable for the Is Mr. Sweeney liable for the outstanding debts of the limited outstanding debts of the limited partnership? partnership?



Legalese:Legalese:

Corporation Corporation -A group of individuals -A group of individuals granted a charter, legally recognizing granted a charter, legally recognizing

them as a separate entity with them as a separate entity with rights rights and liabilities distinct from and liabilities distinct from those of its those of its members. members.



Legalese:Legalese:

Dividend Dividend - A portion of profits - A portion of profits received by received by a shareholder, usually a shareholder, usually in relation to his in relation to his or her ownership of or her ownership of a corporation.a corporation.



Legalese:Legalese:

S Corporation S Corporation - A type of business - A type of business entity entity that offers liability that offers liability protection to its protection to its owners, and is owners, and is exempt from corporate exempt from corporate taxation taxation on its profits. Some on its profits. Some restrictions restrictions limit the circumstances limit the circumstances under under which it can be formed.which it can be formed.



Legalese:Legalese:

Limited Liability Company (LLC) Limited Liability Company (LLC) - A type of - A type of business organization that protects business organization that protects

the the owners from liability for debts owners from liability for debts incurred by incurred by the business, without the the business, without the need for some of need for some of the formal the formal incorporation requirements. The incorporation requirements. The federal federal government does not tax the profits government does not tax the profits of of LLCLLC’’s; however, some states do while s; however, some states do while others do not.others do not.


Common Hospitality Operating Common Hospitality Operating StructuresStructures

Owner-OperatorOwner-Operator FranchiseFranchise Management ContractsManagement Contracts REIT Condo HotelsREIT Condo Hotels



Legalese:Legalese:

Owner-Operator Owner-Operator – A type of operating – A type of operating structure in which the owners structure in which the owners

of a of a business are directly business are directly responsible for responsible for its day-to-day its day-to-day operation. Also operation. Also known, in some known, in some cases, as an cases, as an ““independent.independent.””



Legalese:Legalese:

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



Legalese:Legalese:

Franchisee Franchisee – The person or business that – The person or business that has has purchased and/or received a purchased and/or received a franchisefranchise



Legalese:Legalese:

Franchisor Franchisor – The person or business that – The person or business that has has sold and/or granted a franchisesold and/or granted a franchise



After five years of effort, you After five years of effort, you develop a unique style of roasting pork develop a unique style of roasting pork that is extremely popular in your that is extremely popular in your hometown. You own and operate five hometown. You own and operate five units called Porkies that sell this units called Porkies that sell this product. Each unit costs $175,000 to product. Each unit costs $175,000 to develop. Total sales of each unit develop. Total sales of each unit average $600,000, with a net profit average $600,000, with a net profit margin of 10 percent per unit. margin of 10 percent per unit.



A friend of yours discusses your A friend of yours discusses your success with you, and suggests the success with you, and suggests the possibility of opening five new stores in possibility of opening five new stores in his or her hometown. Your friend wants his or her hometown. Your friend wants to know what you would charge to sell to know what you would charge to sell your recipe and your standard your recipe and your standard operating procedures (SOP) manual, as operating procedures (SOP) manual, as well as the use of the name Porkies. well as the use of the name Porkies.



1.1. How would you determine a fair price How would you determine a fair price for your experience? for your experience?

2.2. If your friend is successful, causing the If your friend is successful, causing the name of Porkies to be even better name of Porkies to be even better known, thus resulting in greater known, thus resulting in greater demand for franchises, should your demand for franchises, should your friend share in future revenue from friend share in future revenue from franchise sales? franchise sales?

3.3. What are the ethical issues at play What are the ethical issues at play here? here?



Legalese:Legalese:

License License - Legal permission to do a - Legal permission to do a certain certain thing or operate in a certain thing or operate in a certain way.way.



Legalese:Legalese:

License Agreement License Agreement - A legal - A legal document document that details the that details the specifics of a license.specifics of a license.



Legalese:Legalese:

Licensor Licensor - One who grants a license.- One who grants a license.



Legalese:Legalese:

Licensee Licensee - One who is granted a - One who is granted a license.license.



Legalese:Legalese:

Management Company Management Company – An entity – An entity that, that, for a fee, assumes for a fee, assumes responsibility for responsibility for the day-to-day the day-to-day operation of a operation of a business.business.



Legalese:Legalese:

Management Contract Management Contract – The legal – The legal agreement that defines the agreement that defines the responsibilities of a business owner responsibilities of a business owner

and the management and the management company company chosen to operate the chosen to operate the ownerowner’’s s businessbusiness



Legalese:Legalese:

REIT REIT – Short for – Short for ““real estate real estate investment investment trust,trust,”” a very special a very special form of form of business structures in which business structures in which the the owners of a business are owners of a business are generally generally prohibited from prohibited from operating itoperating it



Legalese:Legalese:

Condominium Condominium – A multiple-unit complex – A multiple-unit complex (i.e., (i.e., hotel, apartment house, office hotel, apartment house, office building), building), the units of which are the units of which are individually owned individually owned with each owner with each owner receiving a recordable receiving a recordable deed to the deed to the individual unit purchased, individual unit purchased, including including the right to sell that unit, and the right to sell that unit, and sharing in sharing in joint ownership of all common joint ownership of all common grounds, grounds, hallways, and on-site facilitieshallways, and on-site facilities



Legalese:Legalese:Fractional Ownership Fractional Ownership – A purchase arrangement – A purchase arrangement in in which a condominium owner purchases which a condominium owner purchases the use the use of his or her unit for a portion (fraction) of his or her unit for a portion (fraction) of a of a year. The fraction may be defined in year. The fraction may be defined in terms of terms of the number of days per year (i.e., 30, the number of days per year (i.e., 30, 60, etc.) 60, etc.) or very specific days and/or months (i.e., or very specific days and/or months (i.e.,

January 1January 1stst through March 31 through March 31stst for for example). example). Individual units purchased under such Individual units purchased under such an an arrangement are commonly known as arrangement are commonly known as ““fractionals.fractionals.””



Legalese:Legalese:

Condo hotel ownersCondo hotel owners’’ association (CHOA) association (CHOA) – – A A group of condo owners, elected by group of condo owners, elected by all of all of the condo owners in a project, to the condo owners in a project, to

interpret, develop, and implement interpret, develop, and implement the the policies and procedures required to policies and procedures required to

effectively manage their effectively manage their condominium condominium complex. complex.


The Agency RelationshipThe Agency Relationship

Legalese:Legalese:

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



Legalese:Legalese:

Respondeat Superior Respondeat Superior - Literally; - Literally; ““let let the the master respond,master respond,”” a legal theory a legal theory that that holds the employer (master) holds the employer (master)

responsible for the acts of the responsible for the acts of the employee.employee.



Legalese:Legalese:

Fiduciary Responsibility Fiduciary Responsibility – The – The requirement requirement that agents act in the that agents act in the best interests of best interests of their principals.their principals.



The Great Fox Water Park and Resort, located in the Wisconsin Dells area of Wisconsin has received an invoice from Lion Distributing of Reisterstown, Maryland. The invoice is for 10 cases of pool chemicals delivered to the resort two weeks ago. The invoice states Mr. Mark Bell, the resort’s head lifeguard, ordered the chemicals. The price on the invoice is three times the normal price paid for chemicals of this type (which are normally purchased from a local vendor).



When questioned by the hotel’s accounting office about the purchase, Mr. Bell states that all he recalls is that he was working one day and received a telephone call in which the caller asked for the “right” shipping address for the resort. The confirmation of address was needed the caller maintained, because an office mix up had resulted in some shipments of products purchased by its customers being misdelivered. Mr. Bell provided the caller with the hotel’s correct shipping address.



Despite the obvious overcharge, the vendor refuses to accept the shipment back, claiming Mr. Bell, as an agent of the resort, had authorized the purchase of the chemicals. The vendor threatens a lawsuit if their invoice is not paid. Upon investigation, it is determined that one of the 10 cases of product has, at this time, already been used.



1. Assume that Mr. Bell did not ordinarily purchase pool chemicals resort. Is the resort responsible for paying the invoice?

2. Assume that Mr. Bell did in fact ordinarily purchase pool chemicals the resort. Is the resort then responsible for paying the invoice?

3. What steps would you suggest that the resort’s owners take being victimized by potential invoice frauds of this type?



Legalese:Legalese:

Independent Contractor Independent Contractor - A person or - A person or entity that contracts with entity that contracts with

another toanother to perform a particular perform a particular task, but whose task, but whose work is not directed work is not directed or controlled by or controlled by the hiring party. the hiring party.


What Would You Do?What Would You Do?Assume you are responsible for Assume you are responsible for

approving commercial loans at a bank approving commercial loans at a bank where you are the senior lending where you are the senior lending official. You are approached by two official. You are approached by two hospitality management college hospitality management college graduates, each with three yearsgraduates, each with three years’’ management experience acquired after management experience acquired after they had completed their studies. They they had completed their studies. They are seeking a loan slightly in excess of are seeking a loan slightly in excess of $1 million to establish a restaurant in $1 million to establish a restaurant in the community. The funds will be used the community. The funds will be used to lease land, facilities, and equipment, to lease land, facilities, and equipment, as well as for renovation, inventory, as well as for renovation, inventory, salaries, and other start-up costs.salaries, and other start-up costs.


What Would You Do?What Would You Do?

1.1. Will the organizational structure Will the organizational structure selected by the partners have an selected by the partners have an impact on your decision to extend the impact on your decision to extend the loan? loan?

2.2. What other factors would influence What other factors would influence your decision? your decision?

3.3. Would it make a difference to you if Would it make a difference to you if the partners were requesting the loan the partners were requesting the loan to complete a franchise agreement to complete a franchise agreement with an established and successful with an established and successful franchisor? franchisor?


What Would You Do?What Would You Do?

4.4. Would you want to review the Would you want to review the specifics of the franchise offering specifics of the franchise offering circular? Would you want to review circular? Would you want to review the franchise agreement? the franchise agreement?

5.5. What additional information might you What additional information might you request if the partners were seeking request if the partners were seeking the loan to operate as an independent the loan to operate as an independent restaurant? Would it matter if the loan restaurant? Would it matter if the loan were for an existing restaurant, as were for an existing restaurant, as opposed to a new start-up? opposed to a new start-up?


Rapid ReviewRapid Review

1.1. Identify those organizational Identify those organizational structures that result in paying income structures that result in paying income taxes based on distributed, as taxes based on distributed, as compared to earned, profits. Explain compared to earned, profits. Explain the advantages of each approach.the advantages of each approach.

2.2. Identify those operating structures Identify those operating structures that affect the amount of control an that affect the amount of control an owner has over day-to-day operations owner has over day-to-day operations of a business. Explain the advantages of a business. Explain the advantages and limitations of each structure. and limitations of each structure.



3.3. Explain the phrase Explain the phrase respondeat superiorrespondeat superior, in , in terms of liability and organizational terms of liability and organizational structure. Describe a real hospitality structure. Describe a real hospitality situation in which the phrase takes on situation in which the phrase takes on meaning.meaning.

4.4. Compose a letter to a potential lender Compose a letter to a potential lender addressing only the issue of why the addressing only the issue of why the organizational structure you have selected organizational structure you have selected for your new business group makes it for your new business group makes it advantageous for the lender to grant you the advantageous for the lender to grant you the loan you have requested.loan you have requested.



5.5. State the defining characteristics of six types of State the defining characteristics of six types of organizational structures used in the hospitality organizational structures used in the hospitality industry as they relate to:industry as they relate to:

TaxesTaxes LiabilityLiability FinancingFinancing Transfer of ownershipTransfer of ownership

6.6. Explain the concept of Explain the concept of ““fiduciary responsibilityfiduciary responsibility”” and ethics as they relate to the general and ethics as they relate to the general manager of a hospitality operation.manager of a hospitality operation.

7.7. Describe the two primary operating structures Describe the two primary operating structures utilized by condo hotels. utilized by condo hotels.



8.8. Discuss the concept of a Discuss the concept of a ““franchisefranchise”” as it as it relates to reducing an ownerrelates to reducing an owner’’s risk of s risk of failing in a business.failing in a business.

9.9. Identify the best organizational structure Identify the best organizational structure and operational structure for the and operational structure for the business you would most like to own, and business you would most like to own, and explain why they would be best. explain why they would be best.

Chapter 3 HospitalityBusinessStructures. © 2012 Stephen C. Barth P.C. and John Wiley & Sons, Inc....

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