by Deborah Sweeney, CEO of MyCorporation.com
Ready to start up a restaurant or food truck this summer? Before you begin exploring empty lots and scouring the streets for high foot traffic areas in an attempt to find the perfect location for your new eatery, independently owned and small chain restaurants must look into what type of legal structure they should become. While there are several different options available, business owners can’t pick one at random and leave it at that. They have to research what legal structure is the best fit for the size of their business, whether or not the structure offers liability advantages and if there is flexibility when it comes to taxes.
Here are three business structures perfectly suited for individuals running the show solo, working alongside a partner and for those ready to open up a small multi-unit chain set of their very own.
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. Foodservicewarehouse.com sums sole proprietors up as a business entity that legally has no separate existence from its owner. The positives of working within a sole proprietorship include that of all of the structures, it’s the most affordable and easiest to establish and if you are prepared to take on a high amount of responsibility alone, you get to exercise complete control over the restaurant. But owner beware: with no tax or liability assistance on your side that those within partnerships or LLCs enjoy, if the restaurant is sued or has legal action taken against it, the owner is held completely responsible. Not enough money to pay off the debt accrued? You may wind up losing the restaurant and possibly other collateral in the process like your car or home.
Pairing up with a family member or a friend to co-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 plus in establishing a partnership’s corner as the partners within the structure are allowed to share profits and losses, which according to Starting a Restaurant’s Guide include hiring employees and borrowing money. Members of a partnership are also legally liable for their actions as well as the actions of their business partner’s. But you may also have 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 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 flexibility by way of tax-treatment for the entity you decide to tax your profits as, the ability to split the profits made in any way you like, and also personal liability protection (this means not having to say goodbye to your house if things go awry). The money you put into the LLC is the only amount put at risk, unlike a sole proprietorship in which a lawsuit could take away your restaurant, legal action may not do the same under an LLC.
Unfortunately, while owners within LLCs are referred to as members, LLC structures may not be made public. Switching to a C-corporation later on is your best bet if your restaurant takes off. You may also consult an attorney and an accountant if you need additional legal and financial advice for the taxes, liability, and financing that fit into the goals of your restaurant.
Deborah Sweeney is the CEO of MyCorporation.com. MyCorporation is a leader in online legal filing services for entrepreneurs and businesses, providing start-up bundles that include corporation and LLC formation, registered agent, DBA, and trademark & copyright filing services. MyCorporation does all the work, making the business formation and maintenance quick and painless, so business owners can focus on what they do best. Follow her on Google+ and on Twitter @deborahsweeney and @mycorporation.