Key Takeaways

  • Most bar and restaurant owners benefit from forming an LLC due to liability protection, flexible taxation, and simplified management.
  • Corporations (especially C corps) are ideal for owners planning to seek outside investment or go public.
  • LLCs provide the option to elect S corp status, which may reduce self-employment taxes.
  • Sole proprietorships and general partnerships expose bar owners to unnecessary personal liability.
  • Forming separate LLCs for each bar location can help isolate legal risks and financial liabilities.

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)
  • Partnership
  • Sole proprietorship
  • Corporation

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

Why Sole Proprietorships and Partnerships Are Risky for Bars

Sole proprietorships and general partnerships are the least protective and least formal structures for a bar business. In both cases, the business and the owner are legally the same, meaning your personal assets—such as your home, car, or savings—are exposed if your bar faces a lawsuit, health violation penalties, or debt collections. Bars are inherently high-risk due to alcohol service, late-night hours, and customer incidents, making these informal structures especially dangerous. Moreover, banks and investors are far less likely to provide funding to bars not structured as an LLC or corporation.

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.

Is an S Corporation Election Right for a Bar LLC?

Many bar owners structure their business as an LLC but elect to be taxed as an S corporation. This approach helps reduce self-employment taxes by allowing the owner to pay themselves a reasonable salary and receive remaining profits as distributions not subject to FICA taxes. This setup is ideal for bars generating consistent revenue and paying owner-operators a regular income. However, the IRS scrutinizes this election closely, so it’s essential to maintain proper payroll and documentation. Keep in mind that S corps have restrictions on ownership—they cannot have more than 100 shareholders or include foreign owners.

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.

When a C Corporation Might Make Sense for a Bar

Choosing a C corporation can benefit bars aiming for rapid expansion, venture capital investment, or eventual IPO. C corporations allow for unlimited shareholders, multiple classes of stock, and no restrictions on investor types. However, they are taxed as separate entities, meaning bar owners may face double taxation—once at the corporate level and again on dividends. Some owners use this structure to reinvest profits into the business while maintaining long-term growth potential. Additionally, C corps can offer robust benefits packages that attract top talent, which can be crucial for scaling hospitality operations.

Which States Are Best for Incorporating a Bar?

While it’s often easiest and most cost-effective to incorporate your bar in the state where it operates, some states offer regulatory or tax advantages that attract bar owners. Delaware is known for its business-friendly laws and efficient corporate court system, making it a popular choice for larger operations or multi-location bars planning to raise funds. Nevada offers strong privacy protections and no state corporate income tax, while Wyoming offers minimal fees and low maintenance requirements. However, incorporating out-of-state often requires registering as a foreign entity in your operating state, which adds cost and complexity.

Frequently Asked Questions

1. Should a bar be an LLC or corporation?An LLC is usually best for single-location bars due to its liability protection and tax flexibility, while a corporation may suit bars seeking investors or going public.

2. Can an LLC for a bar elect S corporation status?Yes. Electing S corp status may reduce self-employment taxes if the bar generates consistent profits and the owner draws a reasonable salary.

3. What are the risks of running a bar as a sole proprietorship?You are personally liable for all debts, lawsuits, and damages. This structure offers no protection for your personal assets.

4. Can I open multiple bar locations under one LLC?It's generally better to create a separate LLC for each location to limit liability and protect each business unit from the risks of others.

5. Does incorporating in Delaware help my bar business?Delaware can be beneficial for larger or multi-state bars due to its favorable corporate laws, but it’s usually more practical to incorporate in your home state for local operations.

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