Becoming a business owner can be the fulfillment of many entrepreneur’s dreams. Without being properly structured, though, this dream can become a nightmare. Selecting the right legal structure for your restaurant business is one way to ensure a positive foundation.
Should your restaurant business be an LLC- Limited Liability Company? Yes, an LLC provides a restaurant business owner personal asset protection- a lawsuit only puts the business’s assets at risk. This legal structure also provides elective S-Corp or Partnership tax filing (avoiding double taxation), flexible management, and easy low-cost setup and maintenance.
Of course, navigating the tax world and legal structure of a business is not what many entrepreneurs enjoy spending their time doing. Instead, they would rather dedicate hours to the creative process and outputs of their ideas. Continue reading to understand the simply-put ins and outs of structuring your restaurant business as an LLC.
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What an LLC is and What it Does to Help Your Restaurant Business
Navigating the legal structure of your restaurant business can feel overwhelming. To begin, a Limited Liability Corporation (LLC) is a legal structure whose legal owners (termed “members”) benefit from the flexibility that S-Corp and C-Corp organizations cannot offer while having significantly more personal legal protection than Sole Proprietorships and Partnerships.
Learn more in our guide: How to Start Your Small Business Legally – Important Legal Requirements
Personal legal protection in a restaurant business (registered as an LLC) is essential as this prevents a lawsuit from being filed on the owner; instead, a lawsuit may be filed on the restaurant itself, but the owner is legally protected.
This means that if someone is harmed from broken glass, food poisoning, or a mistake is made in the distribution of your waiter’s wages, they can only sue the business, and you do not risk losing your personal assets (like your home, car, etc.).
FYI – If you are interested in opening a restaurant read our detailed list of restaurant startup costs for equipment, rent, food, and marketing here
Personal Asset Protection- Limited Liability
An LLC follows its name pretty well- the owner of an LLC has “limited liability” when it comes to his or her personal assets (such as his home, car, or other owned properties). In terms of restaurant ownership, this can be the best option for most business entities.
If someone were to file a lawsuit for negligence- let’s say because they experienced food poisoning- only the assets of the restaurant would be at risk. So, if they were to win a major lawsuit, the owner might lose the business, but his car and home would never be at risk.
In the restaurant industry, there are many moving parts that are seemingly uncontrollable for the restaurant owner.
Not only are there food and safety regulations that must be followed by each employee, but the employees themselves are often interchangeable and the payroll ever-changing. For this reason, there can, unfortunately, be oversights in management, wages, and more.
When your restaurant is registered as an LLC, you (the business owner) will not have to worry about your personal assets being at risk. If you were only registered as a Sole Proprietorship or Partnership, then your personal assets are tied into the business, and a well-suited lawyer can come after them.
>> How to Name Your Restaurant in 6 Easy Steps
To avoid this nightmare, it is best to register your restaurant as an LLC so that your personal assets are not at risk and you have this limited liability insurance that is associated with your legal registered status.
However, as an LLC, as opposed to a Corporation (that would also provide these limited liability benefits), there are other financial, administrative, and legal benefits, too.
Taxation on Profits as an LLC
Though registering as an LLC provides more legal protection for your business entity than does registering as a Sole Proprietorship or a Partnership, it does not have its own tax filing status with the IRS.
For this reason, your restaurant business that is an LLC will either be taxed as a Partnership, Corporation, or the less common option of the owner’s personal taxes without regard to the business. It is advisable to hire an accountant and attorney to ensure that all legal and tax documentation requirements have been fulfilled.
LLC Filing as a Partnership
As an LLC, a restaurant business will likely file taxes as a Partnership (when there is more than one member) or as a Corporation. Filing as a partnership means that the members of the business will pay personal income tax in direct proportion of their restaurant ownership.
For example, if there are two restaurant owners and one owns 60% of the stake, then this owner will pay 60% of the personal income tax required.
LLC Filing as a Corporation
Under the corporation tax status includes two options: S-Corps and C-Corps. More often than not, a restaurant will electively file as an S-Corp to avoid double taxation of both the business and personal income.
In this option, the legal shareholders (recognized as members under your registered LLC) will pay personal income tax on the profits of the business, but the business itself will not be taxed. This is referred to as a “pass-through” as the business is not taxed.
In a C-Corp, the business undergoes “double taxation” and the business profits are taxed, and then the owner is also taxed on personal income (which would have come from the business).
More often than not, a locally owned restaurant will not reach C-Corp status unless it is able to reach the level of public investment on NASDAQ. You can educate yourself more on LLC vs Corporation taxes in our detailed article.
The entrepreneurial spirit is often more accompanied by someone who is capable of being (and desires to be) their own boss more than someone looking to fit into another’s vision. While this can be beautiful and inspiring from the start, this does not always remain the case if shareholders are brought into the picture.
Registering as an LLC allows you to avoid the responsibilities that come with registering as a Corporation.
If you were to register your restaurant business as an S-Corporation, you would be required to hold shareholder meetings, be annually reviewed, and submit to the input of a Board of Directors. As a C-Corporation, the same responsibilities would ensue and you would also have to consider the public investment permitted in your business. Most restaurants do not reach C-Corp status, though.
While you could avoid the paperwork and administrative responsibilities of a Corporation by simply registering as a Partnership or Sole Proprietorship, this option does not provide you with the legal protection of your personal assets.
Instead, your personal assets are at risk in the event of a lawsuit. So, registering as an LLC is your best bet as a business owner who is looking for legal protection and flexibility in management.
Again, registering as an LLC here means that you will have limited liability to claims that could come in the form of a lawsuit. If someone were to unfortunately fall and become injured in your restaurant, your personal bank account would not be at stake.
Instead, you can know that the liability solely lies on the restaurant entity (if found to be the fault of the business) prompting you to seek appropriate medical care for the injured party instead of tempting you to cover your tracks. Your ethical and responsible management style will remain intact.
You are still able to have a business partner and share the ownership of your restaurant when you register as an LLC. So, if you and your lifelong pal have been dreaming of opening up your city’s newest eatery, this is still an option for you.
But, instead of having to attend meetings with a Board of Directors and other shareholders, you and your business partner can simply hash it all out together and bring your management style to your team.
Along these lines of management and credibility, LLC status also offers your restaurant business a heightened level of credibility. Any person can cook and food (though how well is determined by years of experience and an innate skill set). As a registered LLC, your business becomes credible as it will follow legal provisions that ensure safety and compliance for your restaurant guests.
Automatically, you reach a new level of trust with those whom you hope to invite to dine in your restaurant. But, you do not have the administrative responsibilities (such as shareholder meetings, annual reviews, etc.) as you would as a registered Corporation. And, you avoid the risks of your personal assets being at stake as they would be in a Sole Proprietorship or Partnership.
Easy Low-Cost Setup and Maintenance
What an LLC is and What it Does
Since LLCs operate under the legal statutes put in place by your state (instead of federal statutes), running this type of legal entity has lower associated costs for setup and maintenance.
Additionally, an LLC is going to be easier to set up and maintain meaning that you, as a restaurant business owner, can focus more on your day-to-day vision (food prep, front of house responsibilities, etc.) than the legal requirements of the operation.
There are a variety of sources that will encourage you to register your LLC in a different state to receive a lower rate on your income taxes, but this can end up costing you more in the long run as you have to pay additional fees such as when setting up a bank account or other required form of documentation for presence in the state of registration.
Especially as a local restaurant business owner (or even the owner of a few stores in a franchise), it is best to register your LLC in the state that your businesses are physically located.
We will go over how to set up your restaurant business as an LLC in the next section, but for now, know that this process is simple, relatively quick, and inexpensive- especially compared to other models of legal entities.
You can either file your business with your state, or you can find a company that can do the work for you. There are even free options for the latter- it does not get much easier or inexpensive than that!
In addition to the low cost for setup, maintenance fees are usually minimal in most states.
Even more, the protection that is offered to you (and your business) when you register as an LLC can save you loads in legal fees. If a supplier were to unfairly sue a restaurant business for unpaid bills, even though they delivered spoiled food in the first place, the owner’s assets would not be up for debate in the lawsuit.
Plus, as mentioned in the “flexible management” portion, maintaining the integrity of your organization solely depends on you (and any business partners you have).
You do not have to continually report to a Board of Directors or have shareholder meetings in which you take the time to inform and receive input on your business happenings.
Instead, you (and any business partners of yours) can make these decisions on your own and decide what is best for your restaurant business at the time.
If you would like to change the menu colors, the signage on your doors, or your overall marketing strategy to make your restaurant appeal to an upscale niche community, then you have the power to do so as an LLC. Costs associated with these business decisions are maintained by you and your business partners alone
How to Set Up Your Restaurant Business LLC- Cheap and Easy
Did somebody say free LLC formation?
Yup! Let ZenBusiness file your LLC paperwork for free (all you have to cover is the state filing fee).
Before you stress out about setting up your restaurant business as an LLC, let us warn you ahead of time – it is both a cheap and easy process.
Not only is this an exciting component of the business process (as it makes your vision a reality), but it does not have to be something that feels like a load on your plate. And, even if it does, the load can be lightened very quickly and easily.
There are two main ways to file your restaurant business as an LLC. You can do this yourself with your state’s business office (assuming you are registering your LLC in the state you are physically present), or you can hire a company to do this for you.
It really is that easy. Again, you need to consider which state you plan to register your restaurant business as an LLC before you make this decision. It is recommended to file with the state you are physically present in as this can decrease long-term complications with your business entity.
Even if a neighboring state offers lower rates on income taxes or other opportunities that seem appealing, registering in your own state is often your best bet.
Of course, you can always seek counsel with a corporate tax attorney who will be able to give you all of the ins and outs on tax with a business, but this might not be necessary. It is recommended to have an attorney and accountant on hand for your restaurant business unless you have previous experience in either of these fields.
Leave the “boring stuff” to these professionals, and get back to dreaming about your restaurant’s newest food and beverage offerings.
Complete the Registration Yourself
To make your business a legally registered entity (and to provide you with the personal asset protection and other benefits of an LLC), you will need to follow a few simple steps.
- Choose the state you plan to register your business in. It is suggested that you register your restaurant business in the state you are physically present in.
- Observe the state’s rules and policies. Each state is set up a little differently, so it is important to plan for your state’s rules, policies, and fee/filing regulations.
- Choose a registered agent. This person will receive and send legal documents on behalf of the company entity. Most restaurant business owners opt to be their own registered agent, though some select a registered agent service.
- Review the documentation and information needed by your state agencies. Each state will have different specifics on filing your business, so be sure to prepare this ahead of time. Most of the time, this will be common information like your business name, location, ownership names, etc.
- Mail in your registration papers or file online. Either option is available in most states, so select a registration method that you are most comfortable with. Complete any necessary paperwork, pay the state filing fees, and await your approval.
- Become an officially registered LLC as a restaurant business, and commence celebration. That is all you have to do to become a registered LLC. Now, your personal assets are protected (nobody can sue you, personally, over food poisoning), and you are well on your way to enjoying all that comes with owning a restaurant business.
Complete the Registration with an Organization
Some filing organizations can file all of the information you have and obtain registration for your restaurant business as an LLC. To save yourself any confusion, here are the steps:
- Select your entity type and state of registration. Your entity type for your restaurant business will be an LLC, and the state will be wherever your business is physically present.
- Choose the service you would like to use. This selection is up to you. ZenBusiness can help you form your LLC quickly and easily.
- Provide the information on your business. You will need your business name, physical location, registered agent’s name, etc. The specifics will depend on your state’s filing requirements.
- Await completed registration, and then celebrate the approval. Once you file with ZenBusiness (or other similar organizations), you simply provide your restaurant business’s information and then get back to your day-to-day routine. Once your restaurant business has been approved as a legally registered LLC, it is time to celebrate this pivotal step in becoming a legal entity.
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