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LLC for Restaurant Owners
There is always a market for food, so starting a restaurant business is a good idea no matter what state you are based in. The first step to doing so is forming a business legally, which requires choosing a structure to use. For restaurant owners, this could very likely be an LLC.
In this article, we’ll discuss the importance of an LLC, the various benefits of an LLC for your restaurant business, and any potential drawbacks.
Definition
What Is An LLC?
An LLC, or Limited Liability Company, is a business entity or structure that can provide its owners with asset protection and make taxes easier. Compared to other business entities, it offers great flexibility regarding taxation and governance options. For example, the major difference between an LLC and a corporation is that the owners can be taxed directly on profits instead of filing corporation tax.
In addition, LLCs offer limited liability, which means that their owners are kept separate from their company’s debts. This protects your assets in case of legal action or bankruptcy. All in all, LLCs provide small business owners an attractive structure for starting a business.
Advantages
What Are The Advantages Of A Lawn Care LLC?
Forming a restaurant LLC can do a lot for your operations, resources, and time. Below are a few benefits to note about.
Protection from personal liability
As mentioned, one of the benefits of forming an LLC is that it offers protection from personal liability. If your restaurant is sued for any reason, such as outstanding bills and dram shop law violations, you will not be held personally responsible for any debts or liabilities incurred by the event. This keeps your personal assets, such as your house, car, and savings accounts, among others, from being used to pay off any court-induced fees against your business.
Flexible taxation options
Another advantage of forming an LLC is being able to choose how you want your business to be taxed. For example, you can elect to have your business taxed as a sole proprietorship, corporation, or partnership, depending on your needs. This allows you to tailor the taxation options to fit your restaurant business’s specific needs and goals. You can even change the way your restaurant is taxed after its formation.
Limited paperwork
Lastly, setting up an LLC is easy compared to other forms of business, such as corporations or partnerships. In most states, you must file some basic paperwork with the state government and pay a small fee to form an LLC for your restaurant business. Fewer filing requirements mean less paperwork, allowing you to focus on running your restaurant for the most part of the year.
Disadvantages
What Are The Disadvantages Of A Restaurant LLC?
While there are only a few, restaurant LLCs do have their disadvantages as well. These are the ones you have to consider when you are forming one.
Expenses
Forming an LLC costs more money than a sole proprietorship—the other common way to form a restaurant business. This is due to filing fees, taxes, and possible legal fees associated with creating this type of structure. Maintaining an LLC also requires ongoing costs such as annual filing fees, taxes, and accounting services. Due to these additional expenses, some business owners opt not to set up their restaurants as LLCs.
Limited capital-raising opportunities
While raising capital may not be necessary for all restaurants depending on their size, scope, and needs, those interested in having investors should note that there are limited opportunities available when operating under an LLC structure. For one, you are not allowed to sell stocks, making it difficult for investors to own a stake in your company.
Investors, in general, are also more wary of investing in LLCs directly since the business structure tends to be associated with new business owners. We recommend that you establish your restaurant as a profiting venture first before you begin looking for people to invest in it.
Difficult to sell
It can also be difficult for LLC owners wishing to sell their restaurants. This is because buyers must purchase both assets and liabilities, which can lead to lengthy negotiations over pricing structures and terms. If done without legal guidance, it could end up costing you more money than you initially anticipated.
LLC Formation
How To Create A Restaurant LLC
LLCs are easy to form as long as you check the specific list of requirements your state mandates and comply with them. Of course, there are common steps involved in the formation anyway, namely the following:
- Choose a restaurant LLC name
- Choose a Registered Agent
- File your Article(s) of Organization
- Prepare an LLC Operating Agreement
- Get an EIN
Choose a restaurant LLC name
Choosing a name can be one of the most difficult and important aspects to consider when starting any LLC. It is a crucial part of establishing your brand identity, so it has to be memorable, meaningful, and unique. Legally, the only thing you have to know is that your restaurant should not be named like any other business operating in your state (whether intentionally or not) to avoid trademark infringement lawsuits.
To ensure it’s not in use, search the corporate database of your Secretary of State’s office or an equivalent local agency.
Choose a Registered Agent
Choosing a registered agent is essential for all businesses. They are the ones tasked to receive and submit all legal documents that concern your business. This can be you or a partner, but a trained professional will help you comply with the law better and avoid potential liability issues that could disrupt the launch of your restaurant.
File your Article(s) of Organization
The Article of Organization is the paperwork that registers your restaurant LLC with your Secretary of State. This document contains important information about the company, including its name, address, member names and addresses, registered agent name and address, and more. It also outlines the purpose of the LLC and establishes that it follows all business regulations in that state.
Prepare an LLC Operating Agreement
The Operating Agreement will ensure that your business operates smoother in the long term. This document outlines your management structure, ownership stakes, and the financial duties of each member involved (if the restaurant is co-owned). Having a written document containing the rights and responsibilities of all parties helps protect collaborative efforts and clarify disagreements.
Get an EIN
The final step is to get an Employer Identification Number (EIN). This will allow you to hire employees and open a business bank account for your restaurant—a perk not provided to sole proprietors and partnerships. Applying takes five to ten minutes and can be done on the IRS website.
LLC Taxes
How Are Restaurant LLCs Taxed?
Operating an LLC has its advantages, but it naturally comes with taxes. Here are some of the applicable ones for restaurant LLCs, including income, sales, self-employment, and payroll taxes.
Income tax
When operating a restaurant as an LLC, you must pay income tax on all your profits. This includes money made through business operations such as food sales and catering services. The amount of income tax you owe will depend on your restaurant’s total profits during the year. Your business may also be subject to certain state and local income taxes, varying from state to state.
Sales tax
Your restaurant is responsible for collecting and remitting sales tax on food sales and other taxable services. Sales tax rates vary from state to state, so it’s important to research the laws in your jurisdiction before submitting any payments.
Additionally, your business may be responsible for collecting sales tax from customers who purchase alcoholic beverages at your restaurant.
Self-employment taxes
If you are operating a sole proprietorship or partnership type of LLC business structure, you are considered self-employed and must pay self-employment taxes on all your profits. Self-employment taxes consist of Social Security and Medicare contributions, typically 15.3% of total net earnings each year.
But if you choose to tax your LLC as a corporation, you will not have to pay for self-employment tax. Instead, your earnings will be taxed like an employee on company payroll. The corporation will then have to pay separate taxes to the state.
Payroll taxes
If you employ workers at your restaurant, then you are responsible for withholding various payroll taxes from their wages. You will also need to submit periodic payroll tax returns with the IRS and any applicable unemployment insurance payments, depending on where you live.
Costs
What Are The Costs Of Starting A Restaurant LLC?
Forming a restaurant LLC may seem intimidating, but with a few steps, you can launch yours in no time. Here is a quick list of the essentials:
LLC Costs
State filing fee
$50+
Registered agent service
$100+
LLC formation service
$50+
Operating agreement
$200+
Business license and permits
$50+
Employer Identification Number (EIN)
Varies
Initial legal and accounting fees
$200+
Equipment and supplies
$1,500+
Marketing and advertising
$500+
One of the key costs of forming an LLC is the filing fee, which depending on the state, can be as low as $50 to hundreds of dollars. On top of that, fees for legal and accounting services may also be required. Reserving LLC names sometimes costs an extra $15 to $30. There is also an annual fee and records management fees that vary between states.
Starting a restaurant can be an incredibly exciting but daunting task. Ensuring all legal aspects are in place is essential, and setting up an LLC as your legal business structure helps protect your investments and interests. Taking the time to understand what an LLC is and how to form one for your restaurant will set you up for success in the long run.
For a more detailed overview of forming LLCs in various states, check one of our guides below:
Comparisons
Is LLC The Best Entity For Me?
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LLC vs Corporation (C-Corp)
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LLC vs S-Corp
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