Formalizing Your Business Structure

This may seem like a dull task that can wait, but without formalizing a restaurant structure, you can’t open a bank account for the business or try to get outside investors.

Types of Incorporation

There are two main types of corporations: The C – Corp., the Subchapter S Corp. There is also the LLC, Limited Liability Company, which offers the best of corporations and being sole owner. LLC's are quickly gaining in popularity.

1. C–Corp
   This legal entity exists separately from the restaurant owners. While corporations, of course, can be sued, the corporate shell provides the owners legal protection, as personal assets, in most cases, cannot be confiscated. While the C – Corp. will cost anywhere from $500 to a couple thousand dollars to set up, depending on the lawyer you use, it is worth it if you plan to be in business for at least several years.

2. Subchapter S-Corporation
   You incorporate under state law, and becoming a Subchapter S-Corporation on a federal level is optional. If the company does incorporate at the federal level, there are additional tax benefits to be reaped. There is a limit to the number of investors that are allowed with a Subchapter S-Corp. Also, there is no corporate tax return to file, as gains and losses pass to the individual investors in the corporation and are included on their tax returns. Setting up this kind of corporate shell isn’t cheap because it’s somewhat complex. Consult your accountant and attorney before deciding on which corporate structure is best for your situation.

3. LLC
   These became available in more and more states, they oftentimes replaced the Subchapter S-Corp. LLC’s combine many of the best features of the C-Corp. with additional tax and liability benefits. Many restaurants are choosing this structure. Check with your financial and legal advisors to confirm that this is the way to go.

Remember that a new corporate shell doesn’t have to be created every time you want to start a new restaurant. Often, all that is required is filing a dba (doing business as) Certificate with your state. What this essentially does is legalize a new business entity under the existing corporate structure. Be sure to check with your attorney about your specific circumstances.

Corporations also offer tax benefits that your accountant can explain to you in detail. In C - Corporations, all gains and losses are absorbed by the corporation.

Sole Proprietorships

This is also known as a Schedule C business, referring to the schedule name on the personal income tax form where this business would appear.

While this is the easiest and cheapest type of legal structure to set up, it’s not recommended as the best structure for a restaurant, since it holds the owner personally liable if the business goes bankrupt. This means that if there are loan payments owed or if the business is sued, the owner is personally responsible for any money owed and personal assets may be used to pay off debt. Any gains or losses from the business get funneled into your adjusted gross income.