A hotel is a service business in the hospitality sector that earns revenue mainly by renting rooms on a short-term basis, and the federal government classifies it under NAICS code 721110. What type of business a hotel is in a deeper sense — how it’s owned, taxed, and held liable — depends on the legal entity its owners choose and the operational model layered on top. A single independent inn and a hotel inside a publicly traded Real Estate Investment Trust portfolio share the same NAICS code but almost nothing else about how they’re structured.
How the Government Classifies Hotels
The North American Industry Classification System assigns code 721110 to hotels and motels, covering establishments that provide short-term lodging in hotels, motor hotels, resort hotels, and motels. Casino hotels sit under a separate code (721120), and bed-and-breakfast inns, youth hostels, and tourist homes fall under 72119.1U.S. Census Bureau. Sector 72 – Accommodation and Food Services – NAICS A lodging establishment keeps this classification even when its food, beverage, or recreational services earn more than its room rentals.
The older Standard Industrial Classification system still shows up on some federal filings and workplace safety records. Under SIC, hotels and motels fall under code 7011, which covers commercial lodging that provides rooms, or rooms and meals, to the public. The SIC definition also sweeps in casino hotels, seasonal hotels, ski lodges, and bed-and-breakfast inns — a broader grouping than NAICS 721110.2Occupational Safety and Health Administration. Description for 7011 – Hotels and Motels
Agencies use these codes to track economic activity, apply industry-specific labor rules, and enforce zoning. Because hotels sit where real estate meets retail service, they’re also subject to routine health and safety inspections at the state and local level.
Legal Entity Structures for Hotel Ownership
Before a hotel opens, its owners have to pick a legal entity. The choice defines how the business is taxed, who bears liability if something goes wrong, and how easily the owners can bring in outside investors.
Limited Liability Company
The LLC is one of the most common structures for hotel ownership. When a hotel is organized as an LLC, the company is a separate legal entity that can own property, sign contracts, and take on debt in its own name. If the hotel can’t pay its debts, creditors can generally reach only the company’s assets, not the owners’ personal accounts or homes.3Internal Revenue Service. Forming a Corporation An LLC is also flexible on tax: by default, profits pass through to the owners’ personal returns, so there’s no second layer of corporate tax.
C-Corporation and S-Corporation
A C-corporation is its own taxpayer. It pays federal income tax at a flat 21 percent on its profits, and shareholders pay tax again when those profits come out as dividends.3Internal Revenue Service. Forming a Corporation That double layer is a real drawback, but C-corps can issue multiple classes of stock, which helps hotel projects that need to raise capital from many investors.
An S-corporation skips the second layer. Profits and losses pass through to owners’ personal returns, similar to an LLC. S-corps come with limits: no more than 100 shareholders, and all shareholders must be U.S. residents. That makes an S-corp a better fit for smaller hotels with a tight ownership group.
Partnerships and Dual-Entity Setups
General and limited partnerships let two or more parties pool capital to buy or develop a hotel. In a limited partnership, some investors put up money without any management role, while general partners run the business and accept greater personal liability. This is common in larger deals that pull in outside capital.
Many hotel businesses split property ownership from daily operations by using two entities: one holds the deed to the real estate, and another manages guest services. Putting each activity in its own container means a guest’s slip-and-fall claim against the operating company doesn’t directly threaten the real estate holding company, and problems on the real estate side don’t drag in the operating business.
Registration and Federal Tax ID
Whichever structure the owner picks, the business has to be registered with the state. LLCs file articles of organization; corporations file articles of incorporation, usually with the Secretary of State’s office.4U.S. Small Business Administration. Register Your Business Every hotel entity also needs a federal Employer Identification Number from the IRS. An EIN is required for any business that has employees, operates as a partnership, LLC, or corporation, or withholds taxes on payments to non-resident aliens.5Internal Revenue Service. Employer Identification Number
Hotel Real Estate Investment Trusts
A Real Estate Investment Trust is a special kind of company that pools investor capital to buy and hold income-producing real estate. Hotel-focused REITs own portfolios of lodging properties, sometimes dozens of hotels across multiple brands and markets. To qualify as a REIT, the entity must distribute dividends equal to at least 90 percent of its taxable income each year.6Office of the Law Revision Counsel. 26 U.S. Code 857 – Taxation of Real Estate Investment Trusts In exchange, the REIT generally pays no corporate-level income tax on distributed earnings.
Federal tax law also requires that at least 75 percent of a REIT’s gross income come from real-estate-related sources such as rents, and at least 75 percent of its assets be real estate.7Office of the Law Revision Counsel. 26 USC 856 – Definition of Real Estate Investment Trust These rules mean a hotel REIT can’t directly run its own hotels. Running a hotel is an active business, not a passive rental.
Taxable REIT Subsidiary
To get around the restriction on active operations, hotel REITs create a Taxable REIT Subsidiary. The REIT leases its hotel property to the TRS, which then hires a third-party management company to run the hotel. The TRS pays regular corporate income tax on its profits, while the REIT collects rent and keeps its status as a passive property holder.8U.S. Securities and Exchange Commission. Investor Bulletin – Real Estate Investment Trusts (REITs)
UPREIT Structures
Some hotel REITs are organized as Umbrella Partnership REITs. Here the REIT acts as the general partner of an operating partnership that holds the actual hotel properties. A hotel owner can contribute a property to the operating partnership in exchange for partnership units rather than cash. Under federal tax law, that exchange doesn’t trigger capital gains tax at the time of the contribution; tax is deferred until the owner later converts the units to REIT shares or sells them.9Office of the Law Revision Counsel. 26 U.S. Code 721 – Nonrecognition of Gain or Loss on Contribution That makes the UPREIT structure attractive to owners of appreciated properties who want to diversify without an immediate tax hit.
How Each Structure Is Taxed
Federal tax treatment turns on the legal entity. A C-corporation pays a flat 21 percent corporate income tax, and shareholders pay again on dividends.3Internal Revenue Service. Forming a Corporation S-corporations, LLCs, and partnerships generally skip that double layer: income passes through to the owners’ personal returns and is taxed once. A hotel REIT avoids entity-level tax on the income it distributes, but its TRS pays the standard corporate rate on its own earnings.6Office of the Law Revision Counsel. 26 U.S. Code 857 – Taxation of Real Estate Investment Trusts
On top of income tax, nearly every state and many cities charge a transient occupancy tax (also called a lodging tax, room tax, or hotel tax) on short-term stays. The hotel collects the tax from guests at checkout and remits it to the taxing authority. Combined state and local rates vary widely: some areas charge under 5 percent while others exceed 15 percent, and some cities add flat per-night surcharges on top of the percentage. These taxes typically fund local tourism promotion, convention centers, and general government services.
Operational Models Layered on the Legal Entity
Two hotels with identical legal structures can operate very differently depending on the arrangement that governs branding, staffing, and profit-sharing.
Independent Hotels
An independent hotel is a standalone business where the owner controls the brand name, the decor, the service standards, and the pricing. There are no royalty payments to a parent brand and no corporate design requirements. The tradeoff: the owner has to build brand recognition from scratch and handle marketing, reservations, and quality control internally.
Franchised Hotels
A franchised hotel operates under a recognizable brand name, like a Hilton Garden Inn or a Courtyard by Marriott. The franchisee pays an ongoing royalty, typically 2 to 6 percent of gross room revenue, for the right to use the brand’s name, reservation system, and loyalty program. Additional marketing or advertising contributions can push total brand-related fees higher. In return, the owner taps a steady stream of guests drawn by the brand’s reputation.
Federal law requires franchisors to deliver a Franchise Disclosure Document at least 14 calendar days before the prospective franchisee signs any binding agreement or makes any payment.10eCFR. 16 CFR Part 436 – Disclosure Requirements and Prohibitions Franchisees must follow the brand’s property standards on room layout, furnishings, signage, and required technology. If a property slips below standard, the franchisor can impose a Property Improvement Plan requiring renovations.
Soft Brand Collections
Soft brand collections fall between full independence and a traditional franchise. The hotel keeps its own unique name and adds a subtle endorsement, such as “an Autograph Collection Hotel.” The owner gets access to the parent’s reservation and loyalty systems and keeps more control over design and guest experience. Soft brand standards focus more on safety and guest-experience basics than on rigid room-size and decor rules.
Management Contracts
Under a management contract, the property owner hires a professional hotel management company to run daily operations, including staffing, training, budgeting, and guest services. The management company earns a base fee, typically 2 to 4 percent of total operating revenue, and often an incentive fee tied to profitability, commonly 10 to 20 percent of cash flow above a set threshold. This model lets investors own hotel real estate without having to run the hotel themselves.
Obligations That Apply Regardless of Structure
Choosing an entity or operational model doesn’t change a hotel’s core public-accommodation duties. Every hotel open to the public must comply with federal safety and accessibility laws on top of state and local building codes.
The Hotel and Motel Fire Safety Act requires a hard-wired, single-station smoke detector in every guest room, installed per National Fire Protection Association standards, and an automatic sprinkler system throughout buildings taller than three stories.11GovInfo. 15 USC 2225 – Fire Prevention and Control Guidelines for Places of Public Accommodation
Hotels are places of public accommodation under the Americans with Disabilities Act, which prohibits discrimination against guests with disabilities in the enjoyment of goods, services, and facilities.12Office of the Law Revision Counsel. 42 U.S. Code 12182 – Prohibition of Discrimination by Public Accommodations Hotels must provide accessible rooms, common areas, and parking, and make reasonable modifications to policies when needed. Service dogs must be allowed in all guest areas, even at a property with a no-pets policy. If it isn’t clear whether a dog is a service animal, staff may ask only two questions: whether the dog is required because of a disability, and what task it has been trained to perform. Staff can’t ask for certification, can’t require the dog to demonstrate its task, and can’t ask about the nature of the guest’s disability. Emotional support animals aren’t service animals under the ADA and aren’t covered by these rules.13U.S. Department of Justice. Service Animals