Bar, nightclubs, and breweries have more inherent legal risk than other small businesses. While the goal of any nightclub or tavern is to create a communal space where adults over 21 years of age can gather, the reality is operating a business that serves alcohol comes with all sorts of potential hazards. For example if a patron slips and falls on your premises, they could try to go after your personal assets of the claim exceeds liability requirements of your business insurance.
Thankfully, forming an LLC can help mitigate the risk of total financial ruin in the event you’re sued and protect your personal assets like savings, automobiles, or home. Here’s how to start an LLC for a bar or nightclub along with the pros and cons of this entity so you can open the establishment with confidence.
Advantages of an LLC for Bar and Nightclub
The two main advantages that a limited liability corporation affords are liability protections and tax options, but there are some peripheral benefits as well. Using this type of structure for your business could afford all of the following advantages for a lounge.
Personal Liability Protection
Should someone suffer personal injury as a result of a business’ actions, the injured party will seek restitution in many cases. They may sue both the business and anyone involved with it — including owners — if the legal structure of the business allows them to. A limited liability corporation generally prevents injured parties from suing business owners, though, because the structure limits liability solely to the business corporation.
Thus an LLC can act as a legal shield for business owners if the business is liable (or simply sued) for a third-party’s injuries. This legal shield can apply to many situations that bars and nightclubs might face;
- A third party (e.g. patron, vendor, etc.) is injured in a common slip-and-fall accident.
- A patron is over served and injured in an alcohol-related accident.
- A driver is injured in a DUI accident that an over served patron causes.
- Many people get seriously ill as a result of improper food handling if you plan to run a restaurant / bar.
A bar or nightclub might be sued in any of these situations listed above. Even if a business is ultimately exonerated, the legal expense can be costly. Forming an LLC will ensure that lawsuits are limited to only the business and business owners aren’t personally held accountable financially.
Making a toast to your business success.
Personal Privacy Protection
As much as you may enjoy your customers, you probably don’t want everyone knowing your name and other personal information. As an LLC, you can remain anonymous as the owner of the bar or nightclub. This becomes increasingly important the larger your operation becomes.
There are other personal privacy / data threats that you should consider as well. Even though the personal data that bars and nightclubs handle might seem innocuous, compromises can have surprisingly serious consequences. Consider the following scenarios:
- An online attack results in the theft of all customers’ credit card numbers.
- A single customer’s debit card is stolen, and they don’t realize the misuse for a month.
- Employee social security numbers are made publicly available during a data breach.
- A company laptop is left at at the bar by an employee who was working remotely.
Again, forming an LLC would generally shield business owners from personal responsibility for these instances as long as you’re operating the business correctly. The business itself would need protection from a cyber liability insurance policy.
A bar or nightclub’s profitability can vary substantially, and a new one’s profitability will hopefully grow over time. The LLC legal structure gives bar owners two taxation options that offer different accounting and tax benefits.
The default for an LLC is to act as a pass-through entity, which means that the business’ profits pass directly to the business owners. The business owners then pay both self-employment tax and standard income tax on their net profits. The biggest advantage of this is its simplicity, and it’s a taxation strategy that can be managed through retail software or by a basic accounting service.
An LLC can alternatively be taxed like an S Corporation, in which case the business owner is paid a “reasonable salary” as an employee. This allows the business owner to pay a lower tax rate on some of their income, and the owner can also contribute to a 401(k) or pay health insurance premiums with pre-tax dollars.
Running an LLC through an S Corp taxation structure is more involved and costs more in accounting fees. The additional accounting normally costs around another $2,000, but the strategy can make sense with a salary as low as $10,000 annually. Therefore, many profitable bars and nightclubs might be well-suited for this option.
Because tax regulations can change and must be applied to specific situations, you should check with a qualified tax professional who can provide guidance for your particular business before electing either taxation option.
Credibility and Associated Benefits
In addition to these main benefits, being an LLC also gives a business a basic level of credibility. This has associated benefits, as it may help the business grow and is essential for developing customer trust. An LLC structure on its own won’t produce growth and trust, but it’s a foundational element for both of those.
Disadvantages of an LLC for Bar and Nightclub
Despite its multiple advantages that make this business structure a popular choice, a limited liability corporation isn’t right for every situation. It does come with a few downsides that should be considered.
Increased Formation and Annual Fees
LLC businesses normally must pay a fee when the business is formed and annually thereafter. These fees vary by state but are usually reasonable, and they’re well worth paying when starting a bar or nightclub. A sole proprietorship, which is usually cheaper to establish isn’t designed for all that running an alcohol-serving establishment. This type of business is too high risk.
Along with the increased fees comes some additional managerial requirements. An LLC remains a pass-through entity, however, and the additional management that’s involved isn’t overly burdensome. It’s still much simpler than a more complex S Corp or C Corp structure.
As suitable as the LLC structure is for many bars and nightclubs, it may not be well-suited for larger corporations in this industry. Multisite companies, especially those with locations in several states, might find that a more extensive S Corp or C Corp structure is better for their situation.
For most business owners who are just starting a bar or nightclub, though, the size consideration is usually a non-factor. Businesses can start as an LLC, which is easier to set up and run than either an S Corp or C Corp, and they can transition to one of the other structures at a later date when it’s appropriate to.
How to Start an LLC for a Bar or Nightclub
Inside a cocktail lounge.
Choose a Name
Before you actually go to form a limited liability corporation for your bar or restaurant, you’ll first need a name for the business. Brainstorm with others to come up with name ideas, or draw inspiration from anything related to the business. Just be sure that you’re happy with the name, as you’ll list the name on the formative documents and that’ll be the legally registered name of the business.
Choose a Registered Agent
The registered agent of your LLC will be the primary contact person for all legal matters related to the business. They should be comfortable with and attentive to official paperwork, but having a law degree isn’t necessary. The registered agent might be yourself or someone else associated with the business.
Form an LLC for a Bar or Nightclub with ZenBusiness ($49 + State Fees)
File Articles of Organization
At this point, you’re ready to submit the business’ Articles of Organization and officially start an LLC. Articles of Organization is a public document that’s filed in order to form an LLC. The document is also known as a Certificate of Formation or Certificate of Organization in some states.
The Articles of Organization is a fairly straightforward form, although every state has its own format for the form and address where the form should be sent. You can either fill out and file the Articles of Organization yourself (by mail or online), or have an LLC formation service file the document for you.
Details Needed for LLC Articles of Organization
In either case, you’ll need to know several details about your business. The form will likely ask for the:
- Business Name
- Business Address
- Registered Agent
- Other Members’ Names
- Effective Start Date
- Company’s Purpose
The duration can be either perpetual or indefinite. Most bars and nightclubs will want a perpetual duration that doesn’t specify an end date. If a business is serving drinks at only one festival or in a location with a non-renewable lease, however, there are situations where an indefinite duration could make sense. An indefinite duration simply means that the LLC formation lasts until a specified date or event.
The company’s purpose can be as vague as “engage in lawful activities” in some states. Other states may require something a bit more descriptive of your bar or nightclub’s activities. This can be amended later on if a business grows and expands its operations, but just an initial purpose can still afford flexibility for future growth.
Fees for LLC Articles of Organization
The LLC’s formation fees will have to be paid when the Articles of Organization are filed. Filing fees tend to be around $50 to $150, but they can be as high as $500 (or more). Massachusetts has a flat filing fee of $500, and New York has a variable fee that ranges from $200 to $2,000. Kentucky has the lowest filing fee at $40.
The filing fee is only paid when the Articles of Organization are filed and the LLC is formed. Ongoing annual fees will have to be paid yearly in most states, though. Annual fees can range from $0 to about $800. They’re more than filing fees in some states and less than filing fees in others.
Sample LLC Operating Agreement for a Bar or Nightclub
You’ll also need an Operating Agreement, which is a legal document that outlines the ownership stakes and member duties of the limited liability corporation. In other words, the Operating Agreement defines the financial and working roles of all business owners and managers.
The Santos Bar in Montreal.
Whether requested by a state or not, all LLCs should have operating agreements to help clarify the responsibilities of everyone involved and give the business direction. The document also can serve as a contractual agreement if a disagreement between owners ever arises.
The content and form of an Operating Agreement can vary, and there’s no one way to put this document together. In general, however, your Operating Agreement should cover at least six topics;
- Identifying Information: The name, address and registered agent of the business.
- Statement of Intent: A basic statement that the business will start upon the official filing of LLC documents and that the business operates in accordance with all applicable state LLC laws.
- Purpose: A statement that explains the nature and purpose of the business. For example, a bar or nightclub might offer alcoholic beverages, non-alcoholic beverages, food and entertainment geared toward adults. Many purpose statements tack on something such as “and for any other lawful business purposes,” which can allow you to change the purpose at a later date.
- Term: The term defines how long a business operates for. Most bars and nightclubs have terms that last until the business is terminated per its operating agreement or dissolved according to state law.
- Taxation: A simple statement that details how the LLC is to be taxed. Options are as a sole proprietorship, partnership or corporation. (See Tax Benefits.)
- New Member Admission: An explanation of how new business owners can acquire a membership stake in the bar or restaurant should be included. If it’s not included, a new Operating Agreement can be drawn up if the business wants to accept a new owner.
In addition to these foundational items, you might also want to include provisions for initial capital contributions, additional capital contributions, profit and loss distributions, meetings and voting, management, member withdrawal, member death, dissolution or other minutia. What details should be included in your Operating Agreement will depend on your LLC”s specific situation, but it’s often easier to navigate issues later on if you develop a thorough agreement from the outset.
Publish Notifications (If Necessary)
Three states require public notifications of LLCs, and these notifications must be filed within a short time of forming the business. The three states and their general requirements are:
- Arizona: Publish a Notice of Formation in a newspaper for 3 consecutive runs, with a run normally being 1 day per week for a period of 3 weeks. The paper must be in the county of the LLC’s registered agent. This requirement isn’t necessary in Prima or Maricopa Counties (which automatically publish new LLC notifications online).
- Nebraska: Publish a Notice of Formation in a general circulation newspaper near the LLC’s address.
- New York: Publish Notices of Formation in a daily newspaper and a weekly newspaper for 6 consecutive weeks. Both papers must be approved by the County Clerk of the county in which the LLC is registered.
How Much Does an LLC Cost for a Bar or Nightclub?
LLC formation fees vary, but filing costs between $50 and $150 in most states. Filing for a bar or nightclub in Kentucky is just $40, but starting one in Massachusetts runs $500. If you wish to open a new establishment in New York City be prepared to pay $1,200 at the time of filing.
Other Necessary Licenses, Permits and Protections:
Keep in mind that LLC filing costs are just one expense you’ll have to pay when opening a bar or nightclub. Liquor liability insurance premiums, other insurance premiums, a local business permit and a liquor license fee are just some of the other expenses to budget for.
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Are you ready to officially open a bar or nightclub? Take the next step and start an LLC online now. You can expect to complete the LLC formation process in 30 – 45 minutes and you’ll be ready to go.
Frequently Asked Questions
Is an LLC a Good Option for Bar/Nightclub Businesses?
An LLC is a good business structure for most new bars and nightclubs, and many never outgrow this structure. The LLC provides both protections and tax benefits for these businesses.
Should a Bar/Nightclub Be Formed as an LLC or Sole Proprietorship?
A sole proprietorship is generally an inappropriate business structure for a bar or nightclub. The structure leaves owners personally exposed to business-related risks, meaning that they can individually be sued if something happens at the establishment. Additionally, a sole proprietorship may not qualify a business for a liquor license in many jurisdictions.
An LLC is a much better legal business structure for bars and nightclubs, as it does provide business owners with protection and is sufficient for a liquor license in most areas.
Help your customers relax after a long week.
Should a Bar/Nightclub Be Formed as an LLC or Corporation?
Whether a bar or nightclub should be formed as an LLC, S Corp or C corp depends on the size and operations of the business. An LLC is well-suited for most new bars and nightclubs, and there’s likely little reason to incorporate further if a business has only one location. Businesses that eventually open multiple locations, especially if in multiple states, might want to change their legal structure when they expand.
Should a Bar/Nightclub Be Formed as an LLC or LLP?
Bars and nightclubs might be set up as limited liability corporations or limited liability partnerships, although the former often offers some advantage. LLCs can have one or more business owners, whereas LLPs must have at least two partners. Both structures provide personal liability protection for owners. An LLP has a Partnership Agreement rather than an Operating Agreement.
With regard to bars and nightclubs, the most notable difference between the two structures is usually their taxation. LLPs can only be taxed as pass-through entities (like sole proprietorships), but LLPs can be taxed as pass-through entities or as corporations. The latter frequently lowers the total tax liability for owners of profitable establishments.
What’s the Difference Between a Single Member or Multiple Member LLC?
The members of an LLC are the business owners. There is only one member in a single member LLC, and they have complete control over the business. A multiple member LLC has two or more members who share ownership, voting rights and managerial duties as outlined in the Articles of Organization and the Operating Agreement.
What is an LLC?
A limited liability corporation (LLC) is a legal business structure that provides certain liability protections and tax options. The liability protections that the structure affords can shield business owners from a wide range of potential risks, which is especially important when opening a high-risk business such as a bar or nightclub. The tax benefits may help substantially increase how profitable this type of business is to run.
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