Under the laws of the State of Minnesota, how is Extreme Art Studio structured as an entity?
Extreme_Art_Studio Franchise · 2024 FDDAnswer from 2024 FDD Document
The entity is structured as a limited liability company ("LLC") under the laws of the State of Minnesota. A limited liability company is classified as a partnership for federal and state income tax purposes and, accordingly, the income or loss of the Company will be included in the income tax returns of the members. Therefore, there is no provision for federal and state income taxes.
The Company follows the guidance under ASC 740, Accounting for Uncertainty in Income Taxes. ASC 740 prescribes a more-likely-than-not measurement methodology to reflect the financial statement impact of uncertain tax positions taken or expected to be taken in the tax return. If taxing authorities were to disallow any tax positions taken by the Company, the additional income taxes, if any, would be imposed on the members rather than the Company. Accordingly, there would be no effect on the Company's financial statements.
The Company's income tax returns are subject to examination by taxing authorities for a period of three years from the date they are filed. As of December 31, 2023, no tax years were subject to examination.
Source: Item 21 — FINANCIAL STATEMENTS (FDD page 49)
What This Means (2024 FDD)
According to the 2024 FDD, Extreme Art Studio Franchising, LLC, was formed on July 20, 2023, as a Minnesota Limited Liability Company (LLC). For federal and state income tax purposes, the LLC is classified as a partnership. This means that the income or loss of Extreme Art Studio will be included in the income tax returns of its members, and the company itself will not be subject to federal and state income taxes. Instead, the tax obligations pass through to the members.
This structure has implications for prospective franchisees because it clarifies how Extreme Art Studio handles its income taxes. Since Extreme Art Studio is treated as a partnership for tax purposes, it does not pay income taxes directly. Instead, its income and losses are passed on to its members, who then report these amounts on their individual tax returns. This is a common structure for small businesses as it avoids double taxation, where the company pays taxes on its profits, and then the owners pay taxes again when they receive distributions.
Furthermore, the FDD states that if taxing authorities were to disallow any tax positions taken by Extreme Art Studio, the additional income taxes, if any, would be imposed on the members rather than the company. The company's income tax returns are subject to examination by taxing authorities for a period of three years from the date they are filed. As of December 31, 2023, no tax years were subject to examination.