Legal Structures in the Restaurant: Sole Proprietorships, Corporations, Partnerships and LLCsLegal Structures in the Restaurant: Sole Proprietorships, Corporations, Partnerships and LLCs
A new restaurant, like any other business, needs a legal structure in order to operate and pay the appropriate taxes. The initial legal structure will determine where you get funding for your new restaurant, whether you will be going to investors, a bank or into your own savings account. Your restaurant’s legal structure will also determine how you are taxed, what your management structure will be and whether or not any of your personal assets can be used as collateral against restaurant debts.
Different Legal Types
Listed below are the four types of legal structures around which you can form your new restaurant:
- Sole Proprietor. In a sole proprietor restaurant, one person is in charge. One person receives all the profits or assumes all of the debts for the restaurant. That individual’s personal assets can be seized to pay off any outstanding restaurant debt. >>Learn More (Restaurants Organized as Sole Proprietorships)
- Partnership. In a partnership, two or more individuals form a partnership agreement before starting a new restaurant. Typically, one partner’s personal assets act as collateral against the restaurant’s debt. This is an ideal model for someone who does not have enough initial funding for their new restaurant. >>Learn More (Restaurants Organized as Partnerships)
- Corporation. Corporate restaurants are usually reserved for franchise, or large chain restaurants. Either a C corp. or S corp. can be formed, depending on how the restaurant wants their taxes and ownership structured. >>Learn More (Restaurants Organized as Corporations)
- Limited Liability Company (LLC). An LLC is a relatively new legal structure and combines the tax flexibility of a sole proprietorship or partnership with the personal asset protection of a corporation. >>Learn More (Restaurants Organized as Limited Liability Companies (LLCs))
Changing Your Business Structure
Once you decide on a legal structure for your new restaurant, it is not written in stone. Many of the franchise restaurants in America started out as a sole proprietorship and eventually became publicly traded corporations. A word of advice: it is easier to start out as a sole proprietor or partnership and move up to an LLC or C-Corp. Going the other direction is much harder.
Among the necessary processes of opening a new restaurant and choosing a legal structure is choosing a name for your restaurant. It is important that you “assume the name” of your restaurant for tax purposes. This will help when filing taxes at the end of the year in case you have any other forms of income. When choosing a restaurant name, it is also important that you check with your state and regional trademark and copyright registers to assure that the name you choose does not infringe upon another establishment.
Selecting Your Legal Structure
When you have settled on a legal structure for your new restaurant, you will need to file the appropriate documentation with the IRS to make everything legal. You may want to hire a business lawyer who can help you prepare and file all of the necessary documents. You can also visit the IRS site to view and download all of the necessary forms yourself.
- Visit the IRS site on Partnerships
- Visit the IRS site on S corporations
- Visit the IRS site on C corporations
- Visit the IRS site on Sole Proprietorship
- Visit the IRS site on LLCs
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