Before you can start looking into zoning restrictions or have your proposed site inspected, you should first explore the legal structure options for your restaurant. While there are several different options available, business owners can’t pick one at random and leave it at that. Considerations include what type is the best fit for the size of the business, whether it offers liability advantages (for instance, if you are sued will you be able to keep your restaurant or will your personal assets be seized?) and if there is flexibility with taxes.
Three business structures are perfectly suited for these scenarios: An individual running the show solo; two or more partners; and entrepreneurs ready to open their own small multiunit chain.
1. Sole Proprietorship
You’re the boss, but you’re also your own biggest gamble if you decide to set up a sole proprietorship, a legal structure that holds you completely liable for all of the company’s debts. Allfoodbusiness.com sums sole proprietors up as a business entity that legally has no separate existence from its owner. Of all possible structures, it’s the most affordable and easiest to establish. Also, if you are prepared to take on a high amount of responsibility alone, you get to exercise complete control over the restaurant.
The downside? Without the tax or liability advantages provided by partnerships or LLCs, the owner is personally responsible if the restaurant is sued or faces legal action. If you don’t have enough money to pay off the accrued debt, you may wind up losing the restaurant and possibly other collateral in the process, such as your car or home.
2. Partnership
Pairing up with a family member or a friend to open a fun new eatery? The partnership is the ideal legal structure if two or more individuals decide to set up a restaurant together. Teamwork is a big advantage to establishing a partnership. Partners within the structure are allowed to share profits and losses. Members of a partnership are also legally liable for their actions, as well as the actions of their business partners. But partnerships may also cause more trouble with taxes and liability than one would have under a corporation.
3. Limited Liability Company (LLC)
Do you still want to open a chain of restaurants alone, and are you willing to put more money and time into it than chance the risk of being a sole proprietor? The Limited Liability Company (LLC) route is the best way to go. With characteristics of both a corporation and a partnership, LLCs offer tax flexibility, the ability to split the profits made in any way you like, and personal liability protection. The money you put into the LLC is the only amount at risk. Unlike with a sole proprietorship, your assets have some protection from legal action.
Stan Smith, an attorney with Womble Carlyle Sandridge & Rice, says restaurateurs planning on opening multiple units are best off establishing a separate LLC for each location. Doing this, he explains, puts only that restaurant’s assets at risk should a lawsuit occur.
Unfortunately, within LLCs, while the owners are referred to as members (similar to what stockholders within a corporation are), LLC structures may not be made public. Switching to a C-corporation later on is your best bet if your restaurant performs well. You should also consult an attorney and an accountant if you need additional legal and financial advice regarding taxes, liability and financing, and your goals.
Deborah Sweeney is the c.e.o. of MyCorporation, a leader in online legal filing services for entrepreneurs and businesses, providing startup bundles that include corporation and LLC formation, registered agent, DBA and trademark and copyright filing services. Follow her on Twitter: @deborahsweeney and @mycorporation.