Your comprehensive guide for starting a restaurant

Business Structure

Bookmark Print Bookmark and Share

Every restaurant needs to decide what form of business, or legal structure it will be. The different forms of business come with a wide range of legal implications regarding your restaurant, including legal liability in case of lawsuit, taxes and more.

There are four broad categories of business structure:

Sole Proprietorship

This form of business is operated by one person. It is the most common form for small restaurants, and the cheapest and easiest to set up. The restaurant owner has complete control over all aspects of the restaurant. The downside is that it does not offer any tax or liability advantages. Restaurant owners can be personally sued for business-related issues if they operate under sole proprietorship.

Partnership

This structure is designed for two or more people who run a restaurant. It is more complex than sole proprietorship and offers some advantages. The partners share their expertise, profits and losses in specific portions. Business risks are diffused across one or more partners. On the hand, each partner is also legally liable for actions of the other partners, including borrowing money and hiring employees. Similar to sole proprietorships, partnerships lack advantages when it comes to taxes and liability issues.

Corporation (C-Corp)

Setting up a corporation allows restaurant owners to set up a legal entity that exist separately from its owners. The biggest advantage of corporations is that the personal liability of owners and stockholders is limited. Unfortunately, corporations are also the most complex and expensive form of business to start and operate. A double taxation on earnings (corporate tax and personal tax) may result, depending on which state you reside in and the type of corporation. For example, an S corporation allows owners to forgo the double taxation by offsetting business losses with personal income for an additional annual surcharge. Additionally, insurance may be more expensive than for other forms of business.

Limited Liability Company (LLC)

This form of structure is fairly new and is becoming more popular, because it combines certain benefits of a partnership with some of the advantages of a corporation. Many states require the LLC to include more than one person. Owners of LLCs are known as members, which are similar to stockholders of a corporation or limited partners of a limited partnership. LLCs cost more than sole proprietorships to set up, but are less complex and cheaper to set up than corporations.

When deciding which structure is best for your business, determine how each structure fit your restaurant’s goals and your personal requirements when it comes to taxes, liability and financing. Enlisting the help of an attorney and an accountant can help you make the most informed decision.

Bookmark Print Bookmark and Share

Related Articles

Typical Legal Process for Starting a Restaurant »

New restaurant owners may be intimated by the legal process of starting a restaurant. Here is a general outline of the legal steps to launching a...

Registering Your Legal Name »

Before registering your restaurant’s legal name, make sure it is not being used by another restaurant. If you use a name that is trademarked or...

Types of Insurance »

Having proper insurance will reduce your risks of running a restaurant. There are insurance policies for practically all types of potential...

Hiring a Lawyer »

Choosing a lawyer when starting a restaurant is not as simple as picking a name out of a phone book. Smart restaurant owners treat their lawyers as...