When you’re starting a new restaurant business, it’s essential to know what your options are. For example, some business owners operate as sole proprietorships, and others choose to incorporate. But what about LLCs? Can restaurants be LLCs?
If you’re considering opening a restaurant, you might consider going the LLC route. You’ll want to read on if you’re already a sole proprietor or another type of unincorporated business, as there are several benefits to incorporating as an LLC.
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Restaurant Legal Structure
Choosing the proper legal structure for your restaurant business is crucial. The business you select will determine how much you’ll pay in taxes, who can own the company, and how much liability you’ll have to take on.
When it comes to structuring a restaurant, there are five main options to choose from. Each has its advantages and disadvantages based on factors like tax rates, liability protection, and ease of operation. These include:
- Limited liability company (LLC)
- Sole proprietorship
- C corporation
- S corporation
In the United States, LLCs are the most popular choice when choosing a restaurant’s business structure. An LLC offers owners the benefits of both corporations and partnerships. It’s also the safest and most cost-effective option for most restaurant owners.
What’s a Limited Liability Company?
A limited liability company (LLC) is a legal entity that combines the pass-through taxation of a partnership or sole proprietorship with the limited liability of a corporation. LLCs are also easier to create and maintain. In many states, operating as an LLC offers more flexibility than other business structures.
Because LLCs are treated as partnerships for federal tax purposes, profits and losses are passed to owners’ income tax returns. An LLC can be taxed in three different ways:
- As a partnership
- As a corporation
- Through personal tax return(s) as a disregarded entity
There are many different kinds of businesses that use LLCs as their legal structure. Restaurants are one example; since many restaurants operate out of leased spaces with landlords who require personal guarantees from the owners, using an LLC helps protect those who own restaurants from personal liability in case something goes wrong with the property or other issues arise that could lead to lawsuits against them personally.
For example, suppose your local restaurant establishment gets sued for $100,000 because someone fell and injured themselves on the sidewalk outside your restaurant. In that case, you can’t be held personally liable because the business is liable, not you.
LLC Benefits for a Restaurant
The LLC is a popular business entity and is becoming even more so. This popularity is because it offers many benefits that other business structures do not.
One of the most significant benefits of an LLC is that it allows you to be taxed as a corporation or a partnership.
This flexibility means you can choose how your business will be taxed, which can help you save money on taxes. In addition, LLCs have fewer restrictions than corporations and partnerships, making them easier to form and operate.
Personal Asset Protection – Limited Liability
The primary benefit of forming an LLC is that it provides personal asset protection for its owners and managers. Unlike sole proprietorships or general partnerships, LLCs protect from personal liability for owners’ debts and other obligations.
If your business comes under legal attack by creditors or former employees, your assets are protected against claims against them.
For example, if a creditor wants to garnish your wages or freeze your bank account to satisfy money owed by the business, they cannot touch your assets such as real estate or personal bank accounts.
Taxation on Profits as an LLC
As noted above, when you form an LLC, you are no longer personally responsible for taxes on the company’s profits. The LLC doesn’t pay income tax itself. Instead, each owner is taxed on the share of the company’s profits and reports those profits on their income tax return.
The IRS treats an LLC like a partnership or sole proprietorship for federal income tax purposes. As such, your business would not be taxed at the corporate level.
Instead, your business’s profits will be taxed directly to you and other owners as personal income on Schedule K-1s issued by each management team member.
This can save you thousands of dollars in taxes yearly because it eliminates double taxation (paying both corporate income tax and personal income tax).
Hiring an accountant and attorney is advisable to ensure that all legal and tax documentation requirements have been fulfilled.
An LLC gives you great flexibility in how you manage your business and when you take profits out of it, whether as salary or distributions, without having to worry about what kind of impact this might have on your taxes.
In addition, LLCs are run by members, called “members” or “managing members.” You can choose to be both a member and a manager, or you can choose to hire someone else to manage your LLC while you focus on other aspects of your business.
This gives you tremendous flexibility in your leadership style and management style.
You can choose to manage your LLC yourself or hire employees to run it for you. Either way, you have fewer legal restrictions than a corporation or S corporation. For example, you can make significant changes without holding shareholder meetings.
Easy Low-Cost Setup and Maintenance
LLCs are relatively easy to set up, especially compared to corporations or other more complicated entities. You can set up an LLC relatively quickly and easily; it can be done online, and you don’t need an attorney or accountant to help you create one (though I would advise that you should use them).
This makes it easier to start up your business with less money than other forms of business ownership require.
Once you’ve completed your LLC, there are a few ongoing costs associated with maintaining it; however, you will have to pay taxes on your profits at regular intervals throughout the year; these taxes are usually much lower than those produced by other types of businesses.
Insurance is another area where LLCs have an advantage over corporations. The cost of this insurance is much lower than that required by corporations, making it easier for businesses with limited resources to start up and grow without breaking the bank.
What’s a Sole Proprietorship?
A sole proprietorship is a business owned and operated by a single individual. It may be the simplest type of small business structure, but it has drawbacks.
You are both the owner and business entity in a sole proprietorship. There is no legal separation between your assets and those of your business.
You are personally liable for any debts or claims against your company. If someone sues you for damages related to your business activities, they could go after your assets and any money in your business account.
In a sole proprietorship, the owner receives all profits, pays all losses and expenses, and has unlimited liability for any debts or claims against the business. Therefore, it’s essential to have adequate insurance coverage in case something goes wrong. This is why restaurant owners don’t usually form their business as a sole proprietorship.
What’s a Partnership?
A partnership is a business relationship between two or more people who join together to form an enterprise. Each partner shares equally in profits and losses and has unlimited legal liability for all debts incurred by the partnership.
In addition to these risks, partners generally have to divide profits based on their percentage ownership interest in the partnership.
Each partner contributes money, property, or services to the partnership. In exchange, each partner receives an ownership interest in the business and profits from its success.
Examples of partnerships include:
- Limited partnership
- General partnership
- Joint venture
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 ensure you’re making the right decision for your business.
What LLC Structure Is Best for You?
The LLC is a famous business structure for restaurant owners. The LLC route is an excellent choice for small business owners because it provides the flexibility and tax benefits that other types of business structures offer.
There are two basic types of LLC structures can be organized in different ways: single-member and multi-member. A single-member LLC has only one owner, while a multi-member LLC has multiple owners who share profits and losses equally.
Each structure has its advantages and disadvantages that you should consider before choosing which type of business entity best fits your needs.
Steps to Start a Restaurant LLC
Select the State You Are Operating In
The first step to starting a restaurant LLC is to decide on the state where you’ll file your LLC. This is because each state has its own set of laws and regulations that govern the formation of LLCs. In addition, there are specific requirements for operating your business as an LLC in different states.
Many people think they have to choose their home state, but you can even select a state that is not your home state of residence. Depending on where you are located, you may be able to choose which state your LLC is registered in.
However, it is advised that you register your restaurant business in the state where you are physically present.
For example, if you run a restaurant in New York City but live in New Jersey, it makes sense to register your company in New Jersey. This could potentially save you money on taxes and fees.
Name your LLC
In this step, you’ll choose a name for your business and then file the appropriate paperwork to create an LLC in your state.
The title should be clear and concise and should not include words such as “corporation,” “incorporated,” or “company” unless you want to incorporate it at some point in the future. You can choose any name that’s appropriate for your restaurant.
Choose an LLC Registered Agent
The next step is choosing an LLC registered agent, a person or company that provides legal and administrative services for your LLC. The registered agent will receive any legal documents on behalf of your company and notify you of any significant changes.
You can choose any person or company as your registered agent as long as they’re located in-state or out-of-state. Some states don’t require an out-of-state registered agent, but it’s still recommended if you want to expand into other conditions later on.
If you’re using an out-of-state registered agent, make sure they’re correctly licensed by the state where they’re located and have experience working with small businesses like yours.
A registered agent will have experience with the business formation process, so they know what documents are required by each state and how to complete them correctly.
Registered agents also know what information you need to provide to start the LLC legally. Once you choose a registered agent, they will usually provide you with all the information you need to start.
File Your LLC’s Articles of Organization
When you start an LLC, you must file your LLC’s articles of organization with the state where you want to do business. This is generally done through the Secretary of State’s office in the state where you want to form your company.
The process varies by state, but most states require you to fill out a short form and submit it along with a filing fee, which ranges from $50 to $200 in most states.
After submitting, you will get a certificate of formation back from the state and a copy of your articles of organization. The original will be kept on file with the state.
Create an LLC Operating Agreement
An operating agreement is a document that states how the business will be run and how profits will be distributed. It’s recommended that all members of the LLC sign the agreement so that everyone understands their roles in the company and what they’ll get out of it.
This document helps ensure that everyone involved stays on track with their responsibilities and goals for the company. The operating agreement should also include what happens if someone wants out of business or dies unexpectedly (in case there’s no will).
Get an EIN
Before you start a restaurant, you’ll need to get an Employer Identification Number (EIN). This unique number assigned by the Internal Revenue Service (IRS) identifies your business as an employer and makes it possible for you to have employees.
You can apply for an EIN online at the IRS website or by phone. You’ll need to provide information about your business, including its name and address.
You can also use this opportunity to ask about any tax credits or deductions available to small businesses.
Next, you’ll need to register with your state’s Department of Revenue office. This will ensure that you’re compliant with state taxes and other regulations.
Now that you have decided to open a restaurant, are you wondering what type of entity will best protect your assets? While many business structures may be suitable for your operation, one of the most popular is the limited liability company (LLC).
An LLC is a business structure that provides its owners with some protection from personal liability. But it also has other benefits, such as pass-through taxation and flexibility in ownership and management structures.