How to Determine Your Restaurant Business Structure (2024)
So you’ve tackled every single detail of your dream restaurant – your unique brand, a delicious menu, a stunning location, the perfect layout, and a logo that reflects your vision.
But before you switch on that “Open” sign, let’s talk about the nuts and bolts of your restaurant: choosing the right business structure.
Not as fun and exciting as picking dinnerware but it is a foundational step that defines how you’re taxed, who’s on the hook for financial stuff, and even how you grow your business down the line.
Here are the options you can choose from when determining your business structure:
Psst.. we recommend getting the help of an experienced restaurant accountant but more on that later.
The Basics: What Exactly is a Business Structure?
A business structure is a legal framework established by the government that specifies how your business runs in terms of ownership, obligations, and taxes.
Think of your restaurant as one of the dishes you’re excited to introduce to your growing menu.
The business structure is like the recipe you have for this cuisine—it determines the ingredients you need (ownership), how to prepare it (taxation), and how to serve (distribute) the final product (profits, losses, liabilities).
Types of Restaurant Business Structures
Not all restaurants are created equal; the same goes for business structures. Let’s dish up the most common types of business structures to help you figure out the one that works best for you:
Sole Proprietorship: The Solo Chef
Starting with the simplest and most popular choice among many startups, a sole proprietorship is like being a solo, passionate chef at your restaurant.
You run the show by yourself and are in charge of all decision-making. The reward for all that hard work? You get to take home all the profits!
But here’s the catch. As sole owner, you’re also responsible for all the financial setbacks or debts that your business incurs.
In tax language, your business is on pass-through status where profits and losses are part of your personal tax return.
Sole proprietorships are also easy to set up and inexpensive in terms of organizational fees. Forming and dissolving the business also does not require much paperwork and overall, keeps overhead low.
Best For: Individuals starting small, such as a pop-up, a food truck, or a boutique café where you’re testing the waters or prefer to keep things simple and under your personal control
Partnership: The Shared Kitchen
In a partnership, running a restaurant isn’t a solo mission but it’s like having a sous chef you trust implicitly.
Profits and liabilities will be divided among you and your partners based on the terms set in your partnership agreement.
As with a sole proprietorship, partnerships are easy to form, require little paperwork, and enjoy the same pass-through status.
Here’s a quick pro tip: Maintain open communication and clearly define responsibilities among your partners for effective teamwork.
Best For: Those who have complementary skills or resources and are looking for a balance between autonomy and shared risk
Limited Liability Company (LLC): The Protective Apron
An LLC is like wearing a protective apron while cooking. It keeps your personal assets—like your house and car—safe from spills and stains that your restaurant might cause.
This means owners enjoy personal liability protection as their private assets are shielded in case of business debts or legal issues.
In terms of tax, LLCs likewise benefit from pass-through status, avoiding the double taxation often associated with corporations.
So, if we were to make a comparison: LLCs offer better liability protection than sole proprietorships or partnerships, and provide more flexibility than corporations.
Sounds like getting the best of both worlds.
Best For: Medium to large-sized restaurants or those planning to expand so they can protect personal assets while retaining operational flexibility as they scale up
Corporation: The Fine Dining Restaurant
Like fine dining restaurants have head chef leads, sous chefs, line cooks, and servers, corporations operate in a defined hierarchy of management roles in the form of BODs, executives, middle management, and employees.
This formality in structure extends even to how profits, losses, taxes, and other liabilities are handled.
Because a corporation creates a legal entity separate from its owners, profits and losses are attributed to the corporation itself, not the individual shareholders.
Liabilities are extended to shareholders only at a limited point, meaning they’re only on the hook for their investment in the company, not the corporation’s debts.
To pay the price of this robust liability protection, corporations are required to comply with stricter and more complex regulations and paperwork.
And as for taxes, double taxation is often an issue since corporations pay taxes on their profits before dividends are distributed to shareholders, who then have to include these on their personal income tax.
Finally, unlike the other structures mentioned, corporations have the capability to issue stocks which makes them able to scale aggressively by attracting substantial capital investments.
Best For: Larger restaurant operations that require a formal management structure and have ambitions beyond local borders
Fork in the Road: Deciding on Your Restaurant’s Business Structure
When choosing the right business structure for your restaurant, make sure that it not only reflects your current needs but also accommodates future changes.
Here are some practical steps to make this decision easier:
There are a few things you can do to dial in your restaurant expenses.
#1 Keep Future Goals in Mind
Think about what you want your restaurant to be in the next five, ten, or even twenty years.
Are you aiming to just be a humble town favorite, or do you dream of making a name at several locations as a franchise? Albeit uncertain of how things will turn out, your current business structure should still support those visions.
A sole proprietorship might be perfect for a small, artisanal dining spot, while an LLC could better suit a restaurant with plans to open multiple locations.
#2 Assess Your Risk Appetite
Would you rather have assistance or are you prepared to manage a kitchen fire by yourself?
If the thought of being personally liable for business debts keeps you up at night, a sole proprietorship might not be for you.
Instead, an LLC or a corporation, which offers liability protection, might be more your speed, giving you peace of mind while you focus on your culinary creations.
#3 Reflect on Management Style
Are you a hands-on owner who likes to have control over every detail, or are you more interested in sharing the load?
A sole proprietorship can be the best fit if you prefer total control and uncomplicated decision-making.
Conversely, if you value collaborative decision-making or wish to limit your day-to-day responsibilities, considering a partnership or even an LLC could be beneficial.
#4 Understand Tax Implications
Because profits and losses are reported directly on your personal tax returns, sole proprietorships and partnerships provide simplicity and can be beneficial for smaller establishments or those just starting out.
However, if you anticipate significant growth, an LLC provides the same advantage of pass-through taxation but without the complexities of corporate tax structures.
This makes it suitable for restaurants that are looking to expand while keeping tax processes manageable.
Partnering for Your Success
Just like a chef needs a reliable team to create a perfect dish, your business needs expert guidance to thrive. At U-Nique Accounting, we specialize in helping the restaurant industry navigate the complexities of business structures and tax implications.
We’re here to help you not just launch successfully but also keep things running smoothly. Before you open your doors, schedule a call with our team. With the right business structure and our expert advice, you’ll be set for success.
Use the calendar below to schedule your first introductory call or head over to our Getting Started page.
Until next time!
By MATT CIANCIARULO
