Types of IncorporationThere 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.
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.
- 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 isnt cheap because its somewhat complex. Consult your accountant and attorney before deciding on which corporate structure is best for your situation.
These became available in more and more states, they oftentimes replaced the Subchapter S-Corp. LLCs 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.
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 ProprietorshipsThis 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, its 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.