Which business entity is right for your restaurant?

Entity selection can be one of the most influential decisions a restaurant owner can make. The entity that you choose will impact how you file your taxes, and perhaps even the amount of taxes that you pay. While there is no one-size-fits-all solution for restaurant owners, here are a few questions you can ask to help you make the correct entity selection for your restaurant business.

What are your business goals?

Entity selection will affect all the “big picture” sectors of your business, so it’s best to think of your long-term goals when making the determination. Is your goal to grow slowly over time? Do you want to franchise your business? Do you want to create a successful business but then sell off your voting shares? Having flexibility in your ownership structure may be valuable to you, or you may be fine with sticking to a small group of more permanent owners.

How will you fund your restaurant?

If you need additional funding, you can choose to fund your business with either debt or equity. By offering equity to potential investors, you will be giving up a portion of your business, and perhaps a portion of the control as well.

How much liability do you want to carry?

Many entities will protect its owners from being on the hook for the business’s debts, but not all. A sole proprietorship, for example, will most likely expose your personal assets to the risks of your business. A limited liability company (LLC), on the other hand, does a good job at shielding your personal assets from your business’s potential debtors.

What are the tax implications?

Taxes can play a big part in entity selection, especially with the Congressional changes we’ve seen lately. If you’re a sole proprietor, your restaurant’s taxable activities will be comingled on your personal return. If you’re an LLC or a partnership, your restaurant’s activities will be reported on a separate return, but you will pay the tax yourself. If you’re a C corporation, the restaurant will act as its own entity and will pay its own tax. And beyond just your annual tax considerations, you’ll need to think about how exiting the business will be taxed. Often, restauranteurs forget to consider the cost of exiting the business, but it should be an important part of the conversation.

If you’re unsure about the right entity selection for your situation or to find out if you’ve made the correct selection for your restaurant, contact us, for more information.