Friday, July 8, 2011

Why Chinese Restaurants Change Their Names

Obviously stability is quite low in the restaurant community in general and Chinese restaurants in general. One tenant space in San Gabriel has had 14 or 15 different Chinese restaurants in a 20 year period, an especially staggering statistic when considering that one of these tenants kept the space for nine years. Chinese restaurants change names for various reasons--the restaurant is sold to a new owner and the name is not part of the transaction, the lease expires and the landlord refuses to renew it and re-leases the space, the restaurant plain goes out of business and a successor is found etc. etc.

One interesting subcategory is where the name of the restaurant changes, but the restaurant's operation appears unchanged, with the same menu, same waiters, and so on. Sometimes the name change is hardly noticeable, such as a slight change in the spelling of one of the words in the restaurant name. A good reason for this type of name change would be a change in the ownership lineup, even a small one, as Chinese restaurants often have multiple owners, and a slight change in name could be notice to creditors that there are new owners, or perhaps even a new legal entity involved.

Then again, there are the more nefarious reasons for these name tweaks. Sometimes the change in name indicates a new ownership entity, as noted above, but brought about by the desire to stiff certain creditors. Now few creditors are dumb enough to continue to do business with a successor entity if the the predecessor entity has skipped out on their obligations. But there is one category of creditor who is dumb enough to not ask any questions--the government. An accountant who handles a number of Chinese restaurant clients told me that it is not uncommon for a Chinese restaurant to fold up its legal entity and reincorporate into a new one for the express purpose of stiffing the government of unpaid sales tax proceeds. You'd think that the government would be smart enough to figure out the connection between old and new restaurants, particularly with similar sounding names, at identical locations. But clearly this is not the case.

A casual conversation with a waiter at another Chinese restaurant suggests another scam. One day, a popular, longstanding restaurant changed its name to something radically different. Being only an occasional visitor to the eatery I couldn't tell if there were any changes besides the new signs and new menu, so I asked the waiter in charge if this was the same place. He said that it was, then rather cryptically said that when you have been in business for a long period of time, sometime the government makes you do these things. My best guess is that he was referring to the unemployment tax rules, where the taxes the employer pays is based on the magnitude of employee claims for unemployment made against the employer. Now, if you're a brand new business you have no past experience of unemployment insurance claims which can be used to set your rate. So brand new employers are assessed at an arbitrary rate, but a rate which may well be less than that paid by existing employers with an experience rating. Consequently, it can pay for a longstanding Chinese restaurant which may have a high experience rating to go out of business, set up a new entity, and start all over again. Of course there are laws against such a change of identity for the purpose of lowering one's unemployment tax rate, but apparently here too, the government is asleep at the wheel.

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