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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 a limited liability company (LLC)? An LLC provides a restaurant business owner with personal asset protection. If the business is sued, usually only the business’s assets are at risk, not the owner’s personal assets. The LLC structure also provides pass-through taxation (avoiding the double taxation of corporations), flexible management, and easy 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 ins and outs of structuring your restaurant business as an LLC.
The top reason to form an LLC for a restaurant is to gain access to the personal asset protection provided by this business structure.
Whether your restaurant is a small fast-casual cafe or a large sit-down restaurant with a full menu of meals and beverages, you need the limited liability protections that an LLC can provide.
As an example, let’s say that a customer slips on a wet spot on your floor, falls over, and injures themselves. If you operate your restaurant as a sole proprietorship or general partnership, your personal assets — like your house, car, personal bank accounts, etc. — would be at risk if that customer decides to sue your business.
On the other hand, if you form an LLC for your restaurant, and you operate and maintain that LLC in a compliant fashion, the scope of your customer’s lawsuit will be limited to your business assets. In other words, your personal assets will be protected by the business structure you’ve chosen.
However, this is just the tip of the iceberg when it comes to the advantages of the LLC for a restaurant. Another important aspect is taxation. The LLC actually provides its owners with a selection of options regarding how they want the business to be taxed, which can save you a considerable amount of money compared to simply operating as an informal business entity.
Your restaurant LLC can be taxed as a sole proprietorship (for single-member LLCs) or general partnership (for multi-member LLCs), which is the default option (see multi-member LLCs definition).
With this tax structure, your restaurant itself does not pay taxes, but rather the profits are passed through the business entity and your owners pay taxes on that money when they file their own personal taxes.
You can also choose for your restaurant to be taxed as a C corporation, although this option isn’t very popular because it subjects your business to what’s known as double taxation — meaning that your profits are taxed first on the corporate level and again on the personal level when they’re distributed to your owners. However, some larger LLCs can benefit from C corporation taxation because it offers the widest range of tax deductions.
The other option is S corporation taxation. There are quite a few limitations to electing S corp taxation, but most restaurant businesses have no trouble meeting these requirements — your business cannot have more than 100 owners, they all must be either residents or citizens of the United States, etc.
S corp taxation can help your restaurant save money by reducing your self-employment tax burden. Instead of paying self-employment taxes (a 15.3% tax that includes the employer and employee portions of Medicare and Social Security) on all of your business income, you can pay yourself and your co-owners a reasonable salary for your roles and only pay self-employment tax on that portion of your income, while you can reinvest the rest of it into your business without paying this tax.
Compared to operating a sole proprietorship or general partnership restaurant business, the S corp taxation model could save you quite a bit of cash that you can use to buy expensive kitchen appliances and make other improvements to your restaurant, rather than writing a big check to Uncle Sam.
An LLC structure can enhance the credibility of your restaurant business venture. Informal business entities don’t have exclusive assumed business names and typically operate under the personal name(s) of their owner(s). For instance, if your name is Johnny Smith and you operate a restaurant sole proprietorship, your company’s name is also “Johnny Smith,” which obviously isn’t a great name for a restaurant.
In this scenario, you could register a DBA (doing business as) name to give your business the ability to operate under an assumed business name, but DBAs have no exclusivity regarding their naming rights in many states. This means that if another restaurant wants to use your DBA name as their own, they’re not only allowed to do so, but they can actually register a formal business entity with that name, preventing you from continuing to use your own assumed name.
With an LLC, you not only have the rights to exclusive use of a business name, but you will also have either the phrase “limited liability company” or the letters “LLC” in that business name.
This provides your business with a jolt of respectability because customers respect the professionalism displayed by an LLC. Also, they typically feel more comfortable writing checks to a business entity rather than to an individual.
The management flexibility of an LLC offers a significant advantage over a corporation, primarily due to its less rigid structure and fewer formalities. LLCs allow their members to choose between a member-managed or manager-managed structure. In a member-managed LLC, all members have equal rights to participate in the decision-making process, akin to a partnership. This decentralized management style fosters a collaborative environment where members can directly influence business operations and policies. Conversely, a manager-managed LLC delegates decision-making authority to one or more appointed managers, who may or may not be members of the LLC. This flexibility enables LLCs to adapt their management structure to suit the specific needs and preferences of their members, providing a tailored approach to business governance.
In contrast, corporations are typically required to follow a more formal and hierarchical management structure. They must appoint a board of directors responsible for major business decisions and policies, while officers manage daily operations. This separation of ownership and control can create a clear division of responsibilities but also introduces more complexity and formal requirements, such as regular board meetings, minutes, and adherence to corporate bylaws. While this structure can benefit larger organizations with numerous shareholders, it often proves cumbersome for smaller businesses. The rigidity of corporate governance may limit the agility of a corporation to respond quickly to market changes and internal dynamics, making the more flexible management options of an LLC an attractive alternative for many entrepreneurs and small business owners.
First off, let’s quickly outline what an LLC is. LLCs are formal legal entities that are typically taxed similarly to sole proprietorships and general partnership vs LLC, in that the owners include any company profits or losses into their personal returns — the LLC itself does not owe income taxes.
An LLC may also elect to be taxed like a corporation, although this is not a very common option.
There are similarities to corporations, too, especially when it comes to financial responsibilities. In an LLC, the owners or members are not usually personally accountable for the financial status of the business (see members definition). This means that if someone sues your LLC, your personal assets are not at risk. For more information see our LLC definition page.
The formation process for LLCs varies depending on which state you’re forming one in, but in general, the process has some universal steps that need to be taken no matter what state your business is located in.
If you want a comprehensive overview of all the steps required to form an LLC, check out our complete guide on the topic. The basic steps in the LLC formation process in most states are as follows:
Coming up with the perfect name for your new LLC is an important step. You’ll need to choose a name that represents your company and describes what you do, and you’ll also have to make sure it isn’t already in use by checking your state’s business database. You’ll also need to make sure your desired name isn’t already claimed by any state or federal trademarks.
Your LLC’s registered agent (which can be an individual or a professional service) is responsible for receiving important document deliveries from the state — like service of process, annual report reminders, etc. — and forwarding them to you. The registered agent helps ensure that the state always has a reliable point of contact for your business.
The form used to create an LLC is usually called the Articles of Organization, although the name can vary (some states call it the Certificate of Formation or something similar). You’ll need to provide the state with some basic information about your business and its owners. In exchange, the state will formally create your LLC.
The Employer Identification Number (EIN) is a federal tax ID number that essentially functions as a Social Security number for a business. The EIN allows your business to hire employees, pay taxes, apply for bank loans, and more. You can obtain an EIN from the Internal Revenue Service free of charge.
Most states don’t require operating agreements, but every LLC should have one regardless. This is an internal document that outlines several key operational aspects of your LLC. One value of the operating agreement is how it can help prevent ownership disputes down the line by clearly explaining how the LLC will be run.
You will need a business bank account for your LLC, and you’ll probably want a business credit card for work-related expenses, as well. It’s also a good idea to use accounting software like QuickBooks or even hire an accountant to handle your bookkeeping for you.
Depending on your state, you may need a general business license to operate your LLC in compliance with state requirements. Most restaurants need to obtain a liquor license and a foodservice license, and there may be other requirements depending on your location. Don’t forget to check with your state to see if there are franchise or privilege taxes assessed on LLCs, and also see if your municipal and/or county government entities have any further licensing requirements.
Again, these requirements can vary by state, but most states require some sort of regular report to ensure that your LLC’s info is up to date in the state’s business database. Some states require reports each year, while others only require them biennially or not at all. No matter what your state requires, you’ll need to stay on top of it to keep your LLC in good standing.
In today’s hyper-connected world, even a small local restaurant with one location should have a professionally designed website. At Restaurant Den, that’s the main topic of conversation, as this site has tons of tips and tricks to help you design and maintain the restaurant website of your dreams.
This site focuses solely on independently owned and operated restaurants, and they have an extensive resource library packed with helpful tools. You can find webinars, articles, worksheets, and much more on Restaurant Owner’s website.
With Uncorkd, you can trade in your paper menus for sleek digital versions hosted on iPads. Especially for restaurants with rotating menus or large beverage lists, Uncorkd can save you from ever having to tell your customers that you ran out of the items they wanted to order. Uncorkd keeps track of your inventory in real-time to ensure that if an item is on the menu, that same item is also in your kitchen.
If you’re looking for information about a certain segment of the restaurant industry and you can’t find what you need from Modern Restaurant Management, we’d be shocked. This site has everything you need to know to boost your restaurant’s success, from news and trends to video, marketing, operations, design, equipment and technology, and finance and law.
Much like Restaurant Den, Restaurant Engine specializes in restaurant websites. However, for the purposes of this article, we’d like to point you to their excellent blog, which is updated several times per week with invaluable advice for restaurant owners.
What liability risks do restaurants face?
There are quite a few potential liability issues for a restaurant owner. Health code violations are a serious concern, including food-borne illnesses like those caused by cross-contamination or expired food products. In addition, restaurants can be liable for slip-and-fall accidents that can happen in any brick-and-mortar business. In short, you should not operate your restaurant as an informal business entity.
Why should I form an LLC instead of a corporation?
Everyone’s situation is different, and we are not here to provide legal advice. That said, the limited liability company has some concrete advantages over the corporation that makes it the preferred option for many small businesses.
Corporations tend to have more complex formation and maintenance requirements, and they don’t have the taxation advantages of an LLC. The corporation has some advantages of its own (for example, it’s easier to attract investors to a corporation) that make it worth a look, but the LLC is a simpler and more flexible business structure.
Can I serve as my LLC’s registered agent?
Yes, every state allows entrepreneurs to serve as their own registered agents. However, while the role of the registered agent can seem like that of an unnecessary middleman, there is more complexity to this position than some people realize. For instance, you would need to be present and available at your business location during all standard business hours.
Why should I hire an LLC service when I can form my own LLC?
The do-it-yourself route is always an option for LLC formation. However, LLC services are so affordable that there’s really no good reason not to use one these days. In addition, some of these companies often throw in free bonus features that make them an even better bargain.
Need some additional information, check out our ZenBusiness vs LegalZoom page.
Should I form my LLC in my home state, or choose a state like Delaware or Wyoming?
Some people like to form their LLCs in states with favorable legal settings. For instance, Delaware is often seen as the most business-friendly state, as it has an entire court system that’s dedicated solely to business matters. As for Wyoming, this state has some of the most generous anonymity laws for LLC ownership.
However, for most people, your best option is to simply form your business in your home state. Forming in a different state can be a tremendous hassle, and it can add some unnecessary complexity to tax issues as well.
How much does it cost to form an LLC?
The costs of LLC formation can vary quite a bit depending on which state you’re forming one in. For in-depth information about LLC formation costs in your specific state, take a look at our comprehensive guide to state-by-state expenses.
Disclaimer: The content on this page is for information purposes only and does not constitute legal, tax, or accounting advice. If you have specific questions about any of these topics, seek the counsel of a licensed professional.
Written by Team ZenBusiness
ZenBusiness has helped people start, run, and grow over 700,000 dream companies. The editorial team at ZenBusiness has over 20 years of collective small business publishing experience and is composed of business formation experts who are dedicated to empowering and educating entrepreneurs about owning a company.
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