• The different types of business structures
• The federal agencies you will encounter
• An understanding of the local variations
• An overview of the typical legal process
• How to register your name
The restaurant business involves more than cooking, cleaning, and serving. Sure, those tasks are a big part of the business, but you will also need to be a mixture of a real estate agent, banker, lawyer, insurance agent, college student, accountant, human resources specialist, purchasing director, and much more if you expect to make your restaurant work. In addition to learning these skills yourself, you will most likely need to hire others. You will need advice on a myriad of things, especially at first when you negotiate your way through the wonderful world of regulation.
Beyond the fun of the kitchen is a full day’s worth of paperwork for you every day. And when you first start your restaurant, you have even more to do. New restaurants need to have permits, licenses, and forms and need to meet certain requirements. The restaurant business is full of specific rules that you must obey.
This chapter deals with the legal paperwork of restaurant ownership. Here you will learn the types of business structures to choose from, the maze of agencies you must get through, the types of professionals you should hire, and what to do with your permits when they arrive.
Tip Jar
Find an advisor you trust and work through these six questions before deciding on your restaurant’s legal structure:
• Who will the owners of the company be?
• What level of liability protection do you require?
• How do you intend to distribute the company’s earnings?
• What are your financing plans?
• What are the opening requirements and costs?
• How will the legal structure you choose affect your tax strategy?
Business Structure
Every company operates under one of five broad legal classifications:
Sole proprietorship: This kind of business is owned and run by one person and is a common form for small businesses. Although this legal structure is the simplest and cheapest to set up, it can cost you tons in lost tax advantages and increased personal liability.
Partnership: In this business relationship, two or more people agree to share their talents, profits, and losses in specific portions. This structure is more complex than the sole proprietorship and has some advantages, but like the sole proprietorship many restaurant owners have abandoned the partnership structure due to tax and liability issues.
Corporation (C-Corp): This legal entity exists separately from the restaurant owners. A corporation is legally like a person in that it can be sued, own property, or acquire debts. Setting up a corporation is expensive in the beginning, but it is usually well worth the expense if you plan to be in business for a while. Corporations come in many forms and offer better tax advantages and liability reduction than either sole proprietorships or partnerships.
Limited Liability Company (LLC): This structure is becoming more popular and combines the best of many structures, but check with your local advisors to see if and how this structure would benefit you. An LLC combines some of the benefits of a partnership with some of the benefits of a corporation.
SubChapter S-Corporation: This structure has you incorporating under state laws. Then whether you elect to become a S-corporation on a federal level is up to you. If you do not then you get the same tax benefits as a C-corporation, in which everything from tax returns to losses and gains are absorbed by the corporation. As an S-Corporation, there are no corporate tax returns and all of the abovementioned gains and losses go through each of the individual shareholders at their level of involvement. This option tends to be quite confusing and should be discussed with your tax and legal advisors.
The legal form your restaurant takes is a very important decision that should not be made lightly. It’s a tax-related decision, and the tax codes in the United States are many thousands of pages long. The ramifications of making the wrong decision can be quite costly, so don’t make this decision on your own and don’t use a do-it-yourself corporate set-up kit. Find an attorney and an accountant that you can trust with your dream.
