By Vance Cariaga
A critical step in getting your restaurant up and running is choosing its legal structure. You basically have four choices here — a sole proprietorship, a partnership, a limited liability company (LLC), and a corporation — though there are variations within each.
Many restaurants start out as sole proprietorships, which means the owners operate as individuals with no separation between personal and business finances. Partnerships are similar, with the main difference being that each partner is liable for the debts and obligations of all the other partners.
No formal action is needed to form a sole proprietorship, according to the Small Business Association (SBA). If you’re the sole owner, you become a sole proprietorship just by conducting business. Even so, you’ll need to obtain all relevant permits and licenses to operate. Contact your state’s Secretary of State office for more information.
No formal action or paperwork is needed to form a partnership, either. You can create one simply by agreeing to go into business with someone else, according to the Nolo legal website. There are a few steps you’ll want to take before proceeding, however. These usually involve choosing a restaurant name, creating and signing a partnership agreement, obtaining licenses and permits and getting an EIN.
Advantages of Incorporating Your Restaurant Business
Even though it’s simpler to form a sole proprietorship or partnership, it’s usually advisable to form a corporation or LLC. That’s because you can separate and protect your personal assets from your business assets and keep from being liable for a partner’s debts. Corporations also get tax advantages not granted to other types of entities.
A good initial step is to decide what kind of company you want to form for your restaurant. Here are the most common types:
- LLC: An LLC is considered a “pass-through” entity, meaning its profits and losses pass through to the owners. It is formed by one or more individuals or entities through a written agreement that details the company’s organizational structure, including management provisions and how profits and losses are distributed.
- C-Corporation: A C-Corp is allowed an unlimited number of shareholders, all of whom are protected from the corporation’s liabilities. C-Corps are taxed on their profits, while shareholders are taxed on the distributions they receive.
- S-Corporation: S-Corps cannot have more than 100 shareholders and can only issue a single class of stock. An S-Corporation’s profits and losses are distributed to shareholders based on each shareholder’s interest in the business. To qualify as an S-Corp, you’ll need to file Form 2553 with the IRS.
When you’ve decided what type of corporation you want to form for your restaurant, you’ll usually take some or all of the following steps:
- Appoint members or directors.
- Establish bylaws that outline the corporation’s operating rules
- File articles of incorporation or organization.
- Issue stock certificates to shareholders.
- Obtain relevant licenses and permits.
Required Documents for Incorporating a Restaurant Business
Forming a corporation for your restaurant also requires filing various incorporation and financial documents, including those listed below. Just keep in mind that different states have different guidelines, so always consult your state’s Secretary of State office to learn more.
- Articles of Organization (LLCs only): These are required to establish your restaurant business with the Secretary of State. The information you’ll provide here includes the business name, principal street and mailing addresses and the names and address of the person or persons forming the LLC.
- Articles of Incorporation (corporations): These are similar to articles of organization. The data you’ll provide here includes the corporation name, its principal place of business, the name and address of the registered agent, the statement of purpose and the number of shares and stock classes the corporation is authorized to issue.
- Operating Agreement (LLCs): This agreement sets rules for the ownership and operation of the restaurant business. It should include info on members’ percentage interests in the business, members’ voting power and rights and responsibilities, how profits and losses will be allocated, how to amend rules and how the restaurant will be managed.
- Company Bylaws (corporations): Bylaws are used to document how various parties — including shareholders, officers and directors — will oversee the organization and its operations. Among other things, bylaws should include the corporation’s name, address and principal place of business; the names and types of officers and directors; procedures for amending and adding bylaws; procedures for shareholder, board and annual meetings; and the types and number of stock classes offered.
- Shareholders’ Agreement: This is used by stock-issuing corporations and serves as a legal doc that outlines shareholder rights as well as the duties and powers of management and board members. You should also include rules for issuing new shares, rules governing conflicts of interest and guidelines on how to resolve disputes.
- Stock Certificates: Again, these are only necessary for corporations that issue stock. They should include the corporation’s name, the date shares were issued, the signature of the authorizing entity and the company seal.
- Annual Report: In most states, both LLCs and corporations are required to file an annual report with the Secretary of State’s office. This can usually be done online on the state’s website and comes with a fee. The required information typically includes the company name and address, the names and addresses of directors and officers, the Tax ID number, the business purpose, authorized signatures of registered agents and the number of stock shares issued.
The Bottom Line
Every business is unique and has its own goals and priorities. As the restaurant owner, only you can decide which business entity is best for your business. Make sure to review all options and gain a thorough understanding of the tax implications of each so you can choose the right business entity before you open your restaurant.
Vance Cariaga is an award-winning writer, editor and journalist. As a journalist he held staff positions at Investor’s Business Daily, The Charlotte Business Journal and The Charlotte Observer. His work also appeared in Charlotte Magazine, Street & Smith’s Sports Business Journal and Business North Carolina magazine. His reporting earned awards from the North Carolina Working Press Association, the Green Eyeshade Awards and AlterNet. Vance’s collection of short stories, Money, Love and Blood, includes “A Slight Difference of Opinion,” winner of the 2015 Creative Loafing Flash Fiction contest. Another short story, “Saint Christopher,” placed second in the 2019 Writer’s Digest Short Short Story Competition. In addition to journalism, Vance has worked in accounting and restaurant management. He holds a B.A. in English from Appalachian State University and studied journalism at the University of South Carolina.