Organizing Your Restaurant as an LLC: Pros and Cons
A limited liability company (LLC) is a relatively new business structure that is not currently recognized in all 50 states. This form of company combines the best characteristics of both a partnership and corporation. Like the name suggests, LLC owners are only subject to limited liabilities when it comes to their business.
LLCs are governed by a partnership agreement that spells out the duties and obligations of each of its members. In order for an LLC restaurant to function, one person, whether it is a member or corporate officer, needs to be the general manager over the establishment. Other members can serve as a management board, but one person needs to be in charge of the day-to-day operations. If all of the members tried to get involved, there would be too many cooks in the kitchen, and the proverbial sauce would spoil. Many small to mid-sized or family-owned restaurants organize as LLCs due to the business structure’s flexibility and tax benefits.
Benefits to Being an LLC
Listed below are some of the reasons to structure your new restaurant as an LLC:
- Less paperwork. LLCs require less paperwork than a corporation, but a little bit more than a sole proprietorship or partnership.
- Limited liability. Members are protected from some of the company’s debts, so a member’s personal assets cannot be seized to satisfy the needs of the company.
- Unlimited members. The number of members is not limited, as they are with a corporation.
- Tax flexibility. An LLC can be taxed as either a sole proprietor or partnership, meaning the individual members can have the profits taxed as wages earned. If there is only one owner/member, any profits will be taxed as individual income for that person. Either way, the owners will only be taxed once, whereas restaurants organized as corporations may have their profits taxed twice.
Drawbacks to Being an LLC
As with any business structure, there are some drawbacks to setting up your restaurant as an LLC.
- Not available in every state. An LLC is a new business structure and is not currently recognized in all 50 states, so you will want to check with your lawyer to make sure this option is available to you before moving forward.
- Operating agreement not required. The operating agreement spells out what each member is entitled to and what their duties are, but since it is not required for an LLC, some establishments try to get by without one. As a result, there may be too many members trying to run the restaurant.
- Members may have to guarantee loans. Start-up restaurants that have no credit may find funding difficult. For new restaurants organized as an LLC, the members may have to personally guarantee the loans, in which case the members will be liable for the start-up debt.
Where to Start
When selecting any type of legal structure, a good place to start is with a business lawyer. Business lawyers are versed in all of the ins and outs of legal requirements for starting a new business. They can even help you prepare and file the appropriate local, state and federal forms. You can also visit the IRS site for LLCs to gain more information and download the appropriate tax forms.
If an LLC is not for you, check out more information on Restaurants Organized as Corporations.
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