Do you need to create a limited-liability company or LLC to open a restaurant? The short answer is no. You aren’t required to have an LLC to open a restaurant. You can open and operate a restaurant a variety of business entities, including sole proprietor, partnership or corporation.
But, there are a variety of reasons restauranteurs decide to use a LLC when opening a restaurant to protect their personal assets and for tax advantages. I used ZenBusiness to form my LLC for $49 + State Fees and I recommend this service, but there are many other places you can create this structure for a restaurant.
In this guide, I help you understand what the different business structure means for your restaurant with a focus on LLC. I also break down the advantages and disadvantages of using an LLC to open a restaurant so you understand the options.
Advantages Of Using An LLC For Restaurants
Before citing the advantages of an LLC for your restaurant, let’s define exactly what an LLC is to better understand it.
What is an LLC?
LLC or Limited Liability Company is a business structure that puts emphasis on the protection of a business owner’s personal assets. For instance, when the business suffers from debt or is sued, or even when the business goes bankrupt, the owner or owners of an LLC is not held responsible and their personal assets (for example: house, savings or car) are not pursued.
In a restaurant there are many reasons you could end up being sued. You could be sued if a guest accidentally has a hot plate of food dropped on their child’s lap (true story that I know of). After all, there are all sorts of injuries that could happen to employees and guests a like. By forming an LLC, you have a legal layer of protection against from someone taking personal assets like a home or savings.
It is also important to note that an LLC is a mix of a corporation, a partnership, and a sole proprietorship. It’s sort of like a business entity super hero with all sorts of advantages. As mentioned earlier, I filed my LLC using ZenBusiness for $49 + State Fees and the process was straight forward. File your LLC here now.
What is the difference between an LLC, a corporation, a partnership, and a sole proprietorship?
As mentioned above, we said that an LLC is a mix of all the business structures. In fact, you can even call an LLC a hybrid of sorts. So let’s look at what makes each of these distinct.
- Sole Proprietorship – A business with one owner. The business’s profits are filed by the owner through their personal income tax. Sole proprietorship does not have limited liability protection meaning, if you get sued, people can come after your assets and home. That’s not a pleasant thought.
- Partnership – A business with two or more owners. The profits and losses of the business partnership “pass through” the business to the owners or partners, who then pay taxes on their shares of the profits or losses via each partner’s personal tax returns. Partnerships do not have limited liability protection.
- Corporation – A business entity that is separate from its owners or also known as shareholders. The business’s profits are double taxed first at the corporate level and then a second time once the individual shareholders have received their profits. Corporations have limited liability protection.
- Limited Liability Company (LLC) – A business that can be owned by one or more people, even a corporation. The business’ profits and losses are passed through to the owners who then file these via each owner’s personal tax returns. An LLC has limited liability protection.
What are the advantages of an LLC?
Registering your business as an LLC gives you the following advantages:
- Having a limited liability protection is one of the main advantages of an LLC. The owner’s personal assets are protected.
- LLCs do not go through double taxation.
- Aside from being owned by an individual or corporation, LLCs can also be owned by another LLC or a foreigner.
- Can appear more credible than a sole proprietorship or partnership.
- Annual meetings are not required. An annual meeting can be unrealistic for an independent restaurant with a single owner.
What are the disadvantages of an LLC?
LLCs can also have a few disadvantages. Here are a few you should know about:
- When one of the owners of an LLC goes bankrupt or dies, the LLC is dissolved. A business continuation agreement can be issued to ensure that transfer of interests is done when this happens to avoid the business from being dissolved. However, this depends on state laws so it is advisable to check your state what LLC rules they follow.
- LLCs cannot be publicly traded companies. If you have dreams of being traded on the NASDAQ like Panera Bread (Ticker Symbol: PRNA), you’ll want to choose something else.
- LLCs do not attract investors because LLC owners pay their taxes through personal tax returns whether they are given a disbursement or not.
Inside the dining room of a small restaurant.
Why should a restaurant be an LLC?
When you put up a restaurant, any business structure is applicable. But an LLC has some special features that stand out from the rest.
For instance, if you can remember what was mentioned above, the most important thing that an LLC can give owners is that there is limited liability protection. So if a customer sues you for food poisoning or suffering from an allergy attack, you as an owner are not entirely at risk. Only the business and the amount of money you invested when you started the LLC is at risk. Of course any assets including business bank accounts will be at risk too.
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You may apply the same thing when you open several branches of your restaurant in different places. Set up a different LLC every time you open a restaurant and whenever a lawsuit arises, they can only go after that certain restaurant’s assets and not all of your locations.
LLC for a restaurant also has a flexible management structure. You don’t need a board of directors or to schedule annual meetings. You can follow a less formal and relaxed restaurant management structure with an LLC.
But if you do decide that your restaurant’s future would be to go public, then an LLC is not for you.
Limit Your Personal Liability
Now that you’ve understood a great deal how an LLC works, you might wonder, how else can you limit your personal liability? Surely there must be something you can do other than filing your business as an LLC?
There are more ways you can be careful and here are some tips you can follow:
Keep a Complete List of Financial Records
Keeping a complete list of your financial records will help you when you run into some legal trouble your business might face. Documenting them will help show that your personal life and business are separate. Financial records such as paychecks, loan records, and other expenses that your business has paid for are important documents that may help prove you are not liable for the trouble your business may run into.
Keep Personal and Business Transactions Separate
Some people who run a business may use the same credit card for their personal and business transactions and this is not advisable. To help prove that you and your business work separately, make sure to have all your transactions be separate as well. Use a business credit card. Have a business bank account. Receipts must be issued under the business’s name. Keep your personal transactions separate at all times.
Be Careful When Signing Documents
Before you sign business documents, make sure to read everything that is in there. Read the fine print and make sure you’re only signing for business transactions. You don’t want to sign any document that could put your personal affairs at risk.
Can a restaurant be a sole proprietorship?
Any business can take on different kinds of business structure. This includes a restaurant as well. So yes, a restaurant can be registered as a sole proprietorship.
But bear in mind that a sole proprietorship does not have limited liability protection. You and your business are one entity in the eyes of the law. So when your restaurant runs into any legal trouble, you’ll have to face those risks. This is the reason many entrepreneurs use an LLC structure instead: to limit their liabilities associated with running a business.
Can a restaurant be a corporation?
Restaurants can be a corporation too. It has some of the benefits that an LLC has, particularly when it comes to having limited liability protection. Financing is also easy and there is a management structure that is followed. It also makes the restaurant look credible and can invite more shareholders to participate in.
One of the downsides to a restaurant being a corporation is that decision making can be slow. For instance, to change a single item on the menu, it must go through the proper process and discussion among the higher ups for it to pass and be offered on the menu and this could take weeks. As a result, this structure probably doesn’t make sense for new restaurants with only one or two locations.
Can a restaurant be a partnership?
A restaurant can be a partnership. It will function the same way as a sole proprietorship wherein management structure is more relaxed than a corporation’s and decision making can be done quicker. Partnerships can also be great if you’re looking for help when it comes to financing.
Unfortunately, partnerships do not have limited liability protection. You and your partners will be the ones facing any legal issues should there be any. Also, there’s real risk brining on a partner from a financial perspective. If your partner makes a bad business decision that costs the restaurant money, you will be on the hook for paying for that mistake with your own money.
Sole Proprietorship VS LLC: Choosing the Right Business Structure
By now, you might be gearing towards choosing between a sole proprietorship and an LLC. Both business structures are suitable for small businesses and have potential to grow when you become a bigger restaurant.
So let’s break down what the difference is between the two that hasn’t been discussed yet so you can choose the right business structure catered for your restaurant.
When it comes to managing a restaurant, a sole proprietorship differs from an LLC wherein the main factor here is having only one owner for a sole proprietorship. Major decisions don’t have to go through a deciding body like changing a menu abruptly. But the owner does have to make sure the business is running smoothly because they’re the ones who will be facing all legal issues if they should come across any.
For an LLC, decisions can’t be done in a snap especially when an LLC has a couple of owners. There is a process to follow wherein everyone agrees. Some states even require an Operational Agreement that details what role each owner has. There is also the division of profits within each member to think about.
Between the two, a sole proprietorship has the least amount of paperwork to file. Local taxes, business permits, safety and health certificates are just a few of the basic paperwork a sole proprietorship needs to think about. But do check with your local state laws what other paperwork needs to be done.
On the other hand, an LLC has more paperwork because they have more responsibilities to comply to. And with more owners and members running an LLC, the more documents are needed such as membership units, Operational Agreements, recordings of member meetings, and so on. At the same time, when you decide to dissolve the LLC, there will also be a lot of paperwork to be filed.
As for legal protection, an LLC wins this round. The owners of an LLC won’t be personally liable for any debts that the restaurant or business might face whereas a sole proprietorship will have to bear the responsibilities and will be fully liable.
Both business structures are applicable for your business. It just all comes down to the responsibilities you’re willing to face. It is still important to have a legal advisor with you when you make such decisions just so you are able to consult with them your concerns and other matters.
Will I Need To Pay An Assumed Name Filing Fee?
Aside from deciding the business structure you will be using, you’ll also come across a decision whether you’ll be using your legal name or an assumed name for your business.
A legal name is the one you use on all your transactions and found on government identification cards. It is the name you also use when you are purchasing things and the one you place unto issued receipts.
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An assumed name is the name you want to use for your business in the event that you do not want your business to show your legal name. In other occasions, an assumed name also describes what the business is. For example, your legal name may be Joseph Smith and your business is a small café. Your assumed name may then be Smith’s Café.
All business structures can register for an assumed name and yes, there is a filing fee when you decide to apply for this. Fees depend on each state and can be around $5 to $100. In New York, the fee for filing a Certificate of Assumed Name is $25.
Do I Need An Attorney to Form an LLC?
So you’re leaning towards running an LLC but can’t quite make a decision just yet. One of the concerns you might have is if you need an attorney to help you form an LLC. Well, you should be pleased to know that you don’t need one. You can simply file an LLC yourself.
But applying for a business is a big decision and if you feel you may want to get legal help just so you have everything covered, that’s fine too. In fact, hiring an attorney to look through all the necessary details to form an LLC if you’re not familiar with them can help you spot some trouble early on and deal with them first before officially signing up for an LLC.
Are you finally ready to register your business? I used ZenBusiness to file the LLC for my business and was satisfied with the service. You can get this done for $49 + the State Fees and for me the small charge was worth it to make the formation process easy (much cheaper than working with a lawyer!). I hope that this guide in forming an LLC was able to help you decide on a business structure for your restaurant.