Can a Restaurant be an LLC: Everything You Need to Know
An owner of a restaurant may elect to form an LLC. Both an LLC and a sole proprietorship can be a rewarding business structure for a restaurant owner to choose.3 min read
2. What's a Limited Liability Company?
3. What's a Sole Proprietorship?
4. What's a Partnership?
Can a restaurant be an LLC? Yes, a business owner of a restaurant may elect to form an LLC. In fact, both an LLC and a sole proprietorship can be a rewarding business structure for a restaurant owner to choose. Although there are many similarities between the two entity types, there are also many differences.
Restaurant Legal Structure
When it comes to structuring a restaurant in the United States, options are fairly limited. For entrepreneurs looking to start a restaurant, there are five legal structures to choose from:
- Sole proprietorship
- S corporation
- C corporation
- Limited liability company (LLC)
The safest and most cost-effective option for most restaurants is to choose an LLC.
What's a Limited Liability Company?
LLCs run under state statute, as opposed to federal statute. Therefore, it is extremely important to research the ideal business structure before filing as an LLC. Remember, rules and regulations may be drastically different from state to state.
An LLC is a business entity that may have one owner or several. Each owner is referred to as a “member.” An LLC may receive great tax flexibility by providing members with the opportunity to make the best decisions for their business. An LLC can be taxed in three different ways:
- As a partnership
- As a corporation
- Through personal tax return(s) under disregarded entity
As an LLC, owners are protected against a multitude of potential liabilities. For example, consider the unfortunate event of a customer having an allergic reaction while dining at a restaurant. The business would be legally responsible for any damages, but the owner would most likely avoid any personal liability. This makes an LLC a favorable choice for a restaurant because if someone attempts to sue the business, the personal assets of the owner should be protected.
Remember, choosing an LLC isn't just an option for small, locally-owned restaurants. It's even a smart and safe decision for franchises or restaurant chains.
What's a Sole Proprietorship?
A business entity where there is no legal distinction between the owner and the business is a sole proprietorship. While this model provides many benefits, it also makes the owner personally responsible for all loans, debts, and losses. To clarify, a sole proprietorship directly connects the business liability with the personal liability. If a restaurant accidentally serves food to a customer who is allergic to it, that person may take legal action against both the personal assets of the owner and the business.
Deciding to be a sole proprietor is usually favored by entrepreneurs who are looking for total control of a business. However, in the restaurant industry, the risks may be significantly higher. One bad oyster or a slip and fall could cause real harm, not only to your customer but also to your financial portfolio.
The Small Business Administration states that a sole proprietorship offers many positive aspects when starting a new company, including providing total control over the business and the relatively low-cost formation. However, for many restaurateurs, the unlimited personal liability is just too risky.
It's important to consider how this liability will influence the relationship you have with your employees. In this situation, you‘re personally accountable for the actions and mishaps of your staff, whether accidental or intentional. This potentially makes losing a restaurant, and all personal assets, fairly easy and common.
What's a Partnership?
Similar to a sole proprietorship, a partnership is when multiple parties or people share in business ownership. Each partner is responsible for contributing property, labor, money, and skills to the business. In turn, each one earns income generated from the business. The partnership is not required to pay income tax but must file important financial details, including an annual informational return on income, deductions, gains, and losses. Also, all partners should share their contributions to the business on an annual basis.
- Limited partnership: A limit is put on both the input and liability for each partner
- General partnership: Allocates a percentage of earnings to all distributions
- Joint venture: A temporary agreement that may be permanently established or terminated in order to form a limited or general partnership
The various options have many distinctions that make them all unique. That's why it's essential to research the laws at a local and state level to make sure you're making the right decision for your business.
If you need help in determining if a restaurant can be an LLC, you can post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.