Restaurant LLC or Corporation: Everything You Need to Know
A restaurant LLC or corporation choice will depend on your needs although both business structures have many similarities.3 min read
A restaurant LLC or corporation choice will depend on your needs. Although both business structures have many similarities, a limited liability company offers your restaurant the option to be a separate legal entity. Understanding the differences between a limited liability company and a corporation will help you to select which structure will work best for your restaurant.
How to Run a Restaurant: Legal Structure
When selecting a business structure for your company, there are four main choices:
- Limited liability company (LLC)
- Sole proprietorship
It is recommended that the majority of small businesses, such as restaurants, choose an LLC.
However, depending on the state and your entity type, your options may vary. Remember that fees, tax considerations, and reporting requirements will influence your choice in business structure. Consider asking an accountant or attorney for guidance if necessary. Choosing to operate your small business as a partnership or sole proprietorship is strongly discouraged, especially in the restaurant industry. By doing so, you may subject yourself to lawsuits, personal liability, and tax issues
How to Run a Restaurant: LLC
Filing your company as an LLC allows for your business to gain the status as a separate legal entity. Additionally, an LLC can protect you from any personal liability. For example, in the event that a customer suffers an allergy attack while dining at your restaurant, your personal assets will be protected. Unlike a partnership or sole proprietorship, only the funds that you invest into an LLC will be at risk.
If your goal is to open a chain of restaurants, be sure that each location is set up as a separate LLC. This is because in the event of a lawsuit only the assets of the individual restaurant are at risk.
Another reason to choose an LLC for your restaurant‘s legal structure is that this business form is often easier and more flexible. Unlike a corporation, an LLC does not require shareholder meetings, a board of directors, or managerial formalities. There are many other additional benefits to form a restaurant as an LLC. They include:
- LLC owners can divide profits up in any manner that they choose, which is a perk given the risks of opening a restaurant.
- LLCs allow restaurant owners to entice employees or investors to share in the company's profit, including the individuals who decided not to contribute their own equity in the early stages of the company‘s development.
- LLCs offer tax-treatment flexibility. To clarify, profits can be taxed as a “pass-through” entity like an S corporation or taxed as a corporate entity like a C corporation. This means the business owner can avoid paying tax on both personal income and corporate profits.
The majority of LLCs select the S corporation option. However, sometimes the C corporation is chosen to funnel tax-free profits back into the entity in order to save money.
One significant downside to an LLC is that the company can never go public. Many owners decide to form as an LLC and later switch to a C corporation if the business goes public. Generally, if an LLC or corporation has less than five to six members or shareholders, it's a good idea to form an LLC or incorporate in the state where your company will have a physical presence. To clarify, this is the state where your business will be located. For most local companies, the process will be cheaper and easier to form an LLC or incorporate in your home state.
How to Run a Restaurant: Corporation
When selecting your business structure, consider if you want an Initial Public Offering (IPO) of company stock. If so, you must formulate as a corporation. Additionally, some states offer an easier regulatory process than others. For example, Delaware makes it easier to become a corporation than the state of New York does.
A C corporation has separate taxable entities. Each entity will file a corporate tax return and pay taxes at the corporate level. They will also pay taxes on corporate income if the funds received by the owners are dividends.
S corporations must file a tax return at the federal level. Income tax is not paid on a corporate level. Instead, profits and losses are covered by an owner's personal tax return and dividend taxes are paid individually.
If a restaurant owner is a member of an S corporation, he or she can easily replicate the restaurant in another location. This is because, in an S corporation, intellectual rights and property are protected.
If you need help with a restaurant LLC or corporation, you can post your job 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.