No doubt, opening a coffee shop can be a very profitable venture. Anytime you’re able to sell a something for $3.00 (or more) that costs 50 cents to make is appealing economics for a food or beverage business. People drink coffee even in good economic times and bad.
If you’re planning on opening this type of business, how you structure your business as there is risk associated with operating the business to your personal assets. There are a number of choices. You can set it up as a sole proprietorship, with you as the sole owner; as a partnership with one or more other people; or as a limited liability company (LLC). ZenBusiness allows you to form an LLC for $39 + State Fees.
Recommended for LLC Formation: ZenBusiness (Review Score of 37 out of 40)
If you’re not familiar with an LLC, this is a type of corporation structure available in the United States that limits your personal liability while being more flexible and requiring less administration than a corporation.
Advantages of an LLC for Coffee Shops
Limited personal liability and flexibility are just two of the many advantages of structuring your coffee shop as an LLC. Below are just a few examples of the advantages of an LLC.
1. Personal liability protection.
One of the most important elements of an LLC is the protection it offers against personal liability. With an LLC, you can only be held libel for the assets of the company. A successful plaintiff in a lawsuit against you can’t come after your personal assets, like your house, your car or your personal savings account.
How could this happen? Unfortunately, all too easily. Imagine someone slipping on an icy patch in front of your store and suing you for medical expenses. McDonald’s has been sued for serving coffee that was too hot. Perhaps you expand to a coffee truck that gets into an accident with another vehicle. Is it possible for someone to get sick from eating your food? These are all real examples that put a coffee bar at risk of being sued.
2. Protecting personal privacy.
An LLC structure for your coffee shop offers you a measure of privacy you won’t have if you form your business as a sole proprietorship or partnership. With an LLC, your personal information, such as your address and contact information do not become part of the public record.
In some states, you only have to designate a manager for your business and don’t have to list the owners’ names on the Articles of Organization. This can prevent disgruntled employees or customers from seeking you out at your residence or overly-enthusiastic vendors from contacting you at home on your off hours.
3. Tax benefits.
The tax benefits that come with structuring your business as an LLC are another major advantage to this type of structure. An LLC gives business owners significantly greater federal income tax flexibility than a sole proprietorship, a partnership or other popular forms of business structure.
In an LLC, the earnings can be passed through to the owners without the company having to first pay federal taxes on the earnings. This is similar to how a sole proprietorship and partnership works. The owner then pays personal income tax on the money, but it avoids double taxation.
The IRS allows owners of an LLC to choose how they want to be taxed, within certain guidelines. You’ll want to discuss this with your tax accountant before you file your Articles of Organization. It’s important to keep in mind that earnings from an LLC aren’t subject to federal withholding, so if you choose a pass through tax structure, then you’ll be required to pay quarterly estimated taxes on your individual income or face a penalty.
4. Fewer corporate formalities.
An LLC has many fewer corporate requirements than if you structured your business as a corporation. You don’t have to hold regular meetings, keep minutes of these meetings or file annual reports with the state as you do with a corporation.
5. Ability to grow with your business with changing the structure.
When you opt to structure your coffee shop as an LLC, you’re automatically set up for whatever the future has in store for your business. You don’t have to restructure your business somewhere down the road, as you’d be forced to do if you set up as the business as a sole proprietorship as then added partners or decided to form a corporation. An LLC can have one owner or multiple principals.
- Form an LLC with ZenBusiness ($39 + State Fees)
6. Giving your business credibility to creditors and customers
Yet another advantage to structuring your coffee shop as an LLC is the added degree of credibility it gives to your business. When you apply to a bank for a loan or to the Small Business Administration for a grant, they can see that you’ve taken the time to structure your business for the long term, that yours is not an ill-considered hobby-style business that might not be around next month or next year.
Customers also have access to your business information via the myriad of websites that publish public information. These people are also likely to view your in a more professional light if they see and will understand your personal assets are protected under this structure reducing the risk of litigation.
Disadvantages of Structuring Your Coffee Shop as an LLC
While structuring your coffee shop business as an LLC offers a number of benefits, this type of structure isn’t right for every coffee shop owner. Consider the following potential disadvantages of an LLC before making your decision.
1. Increased cost
Setting up an LLC is initially more expensive than structuring the business as a sole proprietorship or partnership. In addition to the filing fees, you’ll likely want to hire a registered agent service (this expense is less than $200 per year) or pay an attorney to fill this role.
While the cost to form an LLC is quite low, forming a sole proprietorship will be even less expensive. Due to the risks associated with running a coffee shop and the amount you’ll invest in a coffee shop, equipment, insurance, and other costs, getting the added legal protection is a no brainer for many coffee shop owners.
2. Takes more time to manage
Another downside to forming an LLC is that it takes more time to file the initial paperwork than a sole proprietorship or partnership. An LLC also takes more time to manage throughout the life of your business. While there is less paperwork involved with an LLC than with a corporation, there’s still more required than when you structure your business as a sole proprietorship or a partnership. We’ll cover the details of managing the admin of an LLC later in this report.
3. Owners’ may be subject to self-employment tax
While an LLC offers the benefit of not having earnings taxed at the company level and then again at the individual level, owners’ earnings may be subjected to the 15.3% self-employment tax. This is because the earnings don’t have any Social Security or Medicare taxes withheld and matched by the company. This usually still comes out in favor of the owner, but it’s something you need to be aware of.
How to Start an LLC for a Coffee Shop
There are several steps involved in starting an LLC for your coffee shop. We’ll walk you through the steps you need to take next.
1. Choose a name for your coffee shop LLC.
The first step to starting an LLC for your coffee shop is to choose a name for the business. It needs to be a name that is unique and distinguishable from all registered business names on file at the time you file your LLC’s formation documents.
For many business owners, the name is something they’ve pondered for years before opening the business. However, if you need help choosing a name, there are a variety of online business name generators that can help you brainstorm. (It’s also a good idea to make sure your desired name is available as a web domain name, since you’ll likely want to create a website for your coffee shop.)
2. Filing Articles of Organization.
The next step to starting an LLC is to file Articles of Organization. Your Articles of Organization, sometimes referred to as the Certificate of Formation, is a legal document that outlines the important details of your LLC. It is the document that needs to be filed with your state’s Secretary of State’s office in order to create your LLC as a legal entity in that state.
Your Articles or Organization needs to include your business name, the business address and the company’s purpose (such as to engage in selling food and beverages). Some states will accept a broad purpose statement, such as to engage in lawful activity. Others require a more specific statement.
You also need to designate a registered agent. This is the person who has agreed to accept service of lawsuits and other official documents on behalf of your company. You can serve as your own registered agent, but it is preferable to hire an attorney or other professional person to fulfill this role. Also required on the Articles of Organization are a start date, whether the LLC is perpetual or indefinite (forever or for a specified period of time), and the full names of the members of the LLC. These are the owners of the company.
Virtually all Articles of Organization are filed online these days. Go to your state’s Secretary of State’s website and follow the directions. While most applications are accepted, your application may be rejected for incomplete information, because your business name is already being used by another registered company, or because you failed to pay the filing fee with your application. You can usually expect a decision on your application in five to seven business days.
3. Choose a Registered Agent
As we mentioned above, you registered agent for your LLC is your point of contact for all legal matters that arise from your business. This can be your lawyer if you have one on retainer, or you can use a registered agent service, a service that will act as your business’ registered agent for a modest annual fee.
4. Creating an LLC Operating Agreement for a Coffee Shop
The next step is to create an LLC Operating Agreement for your coffee shop business. This document defines how the company will be run. It is mandatory in many states, but it is a good idea in all states. A basic Operating Agreement should include the following:
- Identifying information. This is the name and the physical location of your business’ main location.
- Statement of intent. This is a brief statement that in accordance with the LLC laws of your state, you will launch your business as soon as the official LLC documents have been filed with the state.
- Business Purpose. This is a statement of what your business is about. It should include the nature of the business, but may also include a statement like “and for any other lawful business purpose” to cover any changes you may decide to make to your business plan in the future.
- Term. For most businesses, this will state that the business will continue until it is terminated as provided in the operating agreement or until it is dissolved. On rare occasions, you may be operating a business for a set period of time, for instance if you set up a coffee shop business for a World’s Fair or other long-term event that had a definite end date.
- Tax Treatment. Here, you’ll state whether your LLC wishes to be taxed as a sole proprietorship, a partnership or a corporation.
- Admission of New Members. This provision outlines the manner in which someone may acquire an interest in the LLC. If there is no such provision, and you later wish to add a partner, you can always prepare an entirely new operating agreement (without having to re-file the LLC paperwork).
For a good example of an operating agreement for a coffee shop business, check out these real life examples.
Do you need to file the LLC operating agreement?
LLC operating agreements do not need to be filed with the state. However, it’s a good idea to keep this important document with your core business files. You might even consider giving a copy to your attorney.
This last step is only required in a few US states. In New York, Nebraska and Arizona, you must publish a notice about your LLC formation in a newspaper. The number of times you need to publish this notice and the time you have to accomplish this step is different for each of the three states. In New York, you must publish a notice of your LLC within 120 days of your successful filing. This notice must run once a week for six weeks in two papers available in your county, one daily and one weekly.
How Much Does an LLC Cost for a Coffee Shop
The cost of an LLC varied by state, but ranges between $40 and $500 depending on what state the coffee bar is located. Kentucky is the least expensive and Massachusetts is the most expensive. Most states charge around $100 for a filing fee. Click here to form an LLC with our top rated companies for only $39 per year + state filing fee.
Licenses, Permits, and Protection You’ll Need Beyond LLC to Operate
In addition to your LLC, you’ll need a business license, a building permit, a state tax license and retail food and beverage establishment license. You’ll also need to get an Employer Identification Number (EIN) from the Internal Revenue Service. There may also be additional licensing requirements for your state, county or municipality.
Get started now
If you’re ready to start your coffee shop business and structure your LLC, we can help. Read our review of ZenBusiness to start an LLC online today for only $39.
We answer your frequently asked questions.
1. Is LLC a good option for a coffee shop?
Every business owner has to decide for him or herself which type of structure is best for his or her business. However, we think that an LLC has a lot to offer to coffee shop owners. It is flexible enough to allow you to grow and add partners as your business expands. It limits your personal liability and protects your personal information, and it allows pass-through revenue so that you don’t have to pay both business and personal taxes on your business’ profits.
2. What are some disadvantages of structuring a coffee shop as an LLC?
There are relatively few disadvantages to an LLC for a coffee shop owner. These include higher upfront costs and having your earnings possibly be subject to the self-employment tax. (In most cases, you’ll still pay less in taxes than you would with a corporation.)
3. Do you need an LLC to open a coffee shop?
No, you can structure your coffee shop business in a number of different ways, including a sole proprietorship, a partnership or a corporation.
4. How does a sole proprietorship compare to an LLC for a coffee shop?
A sole proprietorship has a single owner. This owner may also elect to structure his or her business as an LLC. With a sole proprietorship, the owner can be held personally liable in the event a court holds the business liable for damages, such as a slip and fall accident, a vehicle accident with a food truck or delivery van or a patron being scalded with hot coffee. With an LLC, as we’ve mentioned above, the amount of liability is limited to the assets of the business. Personal assets are protected.
5. How does a partnership compare to an LLC for a coffee shop?
A partnership structure has multiple owners. Similar to a sole proprietorship, the owners can be held personally liable and their assets seized to satisfy a judgement against the business. Personal assets are protected with a LLC structure. Click here to use ZenBusiness to form an LLC for your coffee shop for $39 + State Fees.