Steps to Starting a Restaurant LLC

Steps to Starting a Restaurant LLC

Restaurant owners choose to form an LLC for their business for many good reasons. This guide will explain in simple language what you need to know about the LLC business structure and how it pertains to restaurants.

  • The pros and cons of forming an LLC
  • How to make sure that an LLC is the best legal business structure for your restaurant
  • The steps to take and forms required to form an LLC
  • Differences in state LLC requirements
  • Costs and fees to form an LLC
  • LLC taxes and filing statuses

Before you decide to form a Limited Liability Company, get up to speed on all the details with this extensive and easy to understand guide.

If you’re currently operating as a sole proprietorship and are looking for increased liability protection you could benefit by registering as an LLC.

Request a POS Demo Now!

Rezku POS for Full-service restaurants

What is an LLC?

An LLC is a limited liability company.

If your restaurant is a sole proprietorship or a partnership, then you—the restaurant owners—are personally responsible for any debts or liabilities incurred in the course of business.

While this can be mitigated to some extent by having comprehensive business liability insurance, it does not provide the depth of protection that you can achieve by forming an LLC.

Protection from liability is the primary reason for forming a limited liability company.

Why is an LLC considered the best business structure for a restaurant?

Reduced liability. Easier to get loans

When you file for an LLC, it is the creation of a separate legal entity. Unlike a partnership or sole proprietorship, the liability risk is absorbed by the LLC.

It works as a firewall, keeping your personal assets out of reach from those who seek to collect on debts incurred by the business.

As a separate legal entity, your restaurant LLC can build its credit independently of your personal credit score. When you build the credit of your LLC, it can achieve a better credit score than you and your partners.

What that means is that even if you or your partners don’t have stellar credit, forming an LLC can help you to get business loans.

LLCs are less complicated than corporations.

Compared to the rules required to qualify as a corporation, an LLC is much less formal.

Some of the requirements for corporations:

  • Maintaining a board of directors
  • Voting members / Non voting members
  • Keeping minutes for meetings
  • More extensive tax filings required

An LLC is cheaper than a corporation.

The cost of filing and compliance are far less than a corporation.

  • An LLC is easier to form — you may not need a lawyer
  • There is less paperwork to file to apply — you can do it yourself
  • There are fewer legal obligations to maintain LLC compliance
  • The filing costs for an LLC is much less than a corporation

Read More: Choosing a Restaurant Business Structure

LLCs can have different kinds of investors than corporations.

Flexible investment sources is another reason an LLC may be the best legal structure for restaurants.

Unlike an S Corp:

  • LLCs have no limit on foreign investment
  • Partners in an LLC can be corporations
  • Or other LLCs and trusts
  • There is no limit on the number of members participating in an LLC

You could avoid unwanted IRS scrutiny.

The IRS tends to look closely at sole proprietorships, especially ones with as much cash handling as a restaurant. They tend to assume that there is a potential for some under-reporting of cash, so you could be a target for audits.

Since nobody likes being audited, forming an LLC could relieve some of this undue attention.

  • LLCs have no limit on foreign investment
  • Partners in an LLC can be corporations
  • Or other LLCs and trusts
  • There is no limit on the number of members participating in an LLC

Request a POS Demo Now!

Rezku POS for Full-service restaurants

Who can form an LLC?

Most states allow even a single member to form an LLC.

And there is no restriction on the top end. An LLC can have an unlimited number of members.

The members of the LLC can be individuals, trusts, other LLCs, domestic corporations, foreign corporations, foreign individual investors and 501(c)(3) charitable organizations.

In some states, the organizer for the LLC must be over 18, but there is no such restriction on LLC members.

Although, having members under 18 can potentially cause some legal complexities regarding contracts with minors.

How are LLCs structured?

Before you file to form an LLC with the state, it’s important to structure the LLC and define the roles of the members.

Organizer - The organizer is the person who files for the LLC with the state. They do this by submitting the LLC’s Articles of Organization with the Secretary of State of the state that the LLC is formed in.

Registered Agent - The person who receives information intended for the LLC, for example, tax documents and legal notices.

The registered agent can be a member or non-member of the LLC, or can be a “registered agent company” that provides this service

The LLC is required to have a registered agent in every state the LLC is registered to do business in.

Statement of authority - This important document is filed with the Secretary of State. It protects the other members of an LLC by specifying which members are authorized to obligate the LLC to a third party.

Without this, it’s possible for a single member of the LLC to represent the company, get loans or otherwise misrepresent the interests of the other members.

To keep all members on the same page, it’s highly advisable to file a statement of authority with the secretary of state. Other members of the LLC will be protected from any unauthorized obligations created by rouge members.

If a member leaves the LLC, it’s important to update the statement of authority filing.

If you were an authorized member and you leave an LLC, be sure to file a denial of authority. Otherwise, you can still be held liable for obligations or have your name used in association with the LLC — even though you’ve left!

Read More: Choosing a Restaurant Business Structure

LLC Management Structure

There are two ways that an LLC can be managed. They are member managed and manager managed.

In the context of an LLC the term “manage” means involvement in the day-to-day operations of the restaurant.

It’s quite possible that not all the members want to be that involved and would rather function simply as investors. This will determine the LLC’s management structure.

In a member-managed LLC, all members are given a vote regarding operational decision-making. To move forward with a decision, the vote must be unanimous.

You can imagine that in some cases, like where there are many members, this could be a burden.

A manager-managed LLC specifies some members who are authorized managers. They don’t have to be members and can in fact be authorized employees.

These designated managers are given the authority to run the day-to-day operations of the restaurant business without requiring the unanimous approval of other LLC members.

How to choose your LLC management structure.

When choosing a management arrangement for your restaurant, consider the following:

Member Managed

A member managed arrangement is useful when:

  • All LLC members have industry and management experience
  • Will be directly working with the public

For example, five friends who start a burger-shop and work together as a crew, or take shifts as managers overseeing employees.

Because of their immediacy with the day-to-day operations and their experience, a member-managed arrangement could work.

Manager Managed

A manager management arrangement is useful when:

  • Some members don’t have management experience
  • They will not be involved in decision-making at the management level

An example of this arrangement would be an investor with a busy day job who is friends with a chef. He doesn’t know enough about the restaurant business or have time to be involved. So he entrusts the chef to make the day-to-day decisions.

Request a POS Demo Now!

Rezku POS for Full-service restaurants

LLC Operating Agreement

The operating agreement is the founding document that explains the role of each member, their obligations and other mutually agreed upon contractual obligations of the partnership.

Additional items found in LLC operating agreements are:

  • How members are added and removed from the LLC
  • How profits are distributed among the members
  • How assets will be distributed if the LLC is dissolved

In a member-managed LLC, the operating agreement can also be used to take some of the decision-making pressure off of some of the members. The operating agreement allows you to do this without the additional complexity involved in formally organizing a manager-managed LLC.

The operating agreement can specify which members are authorized to take unilateral actions on behalf of the LLC. For example, if the members of a restaurant LLC have specialized knowledge.

If one member is a chef, one is an accountant and one is an experienced front of house manager, they can each be granted unilateral decision making in their area of the business while maintaining a member-managed organizational structure.

Voting

When it comes time to make a decision in an LLC company, all members must be in agreement at the time action is taken.

That doesn’t mean they all would have voted the same way, but it does mean that there is no dispute regarding the result.

To achieve this, it’s important that voting rights and the system of weighing votes is spelled out in detail in the LLC’s operating agreement.

Informal Voting - LLCs are considered an “informal” business structure. And that’s part of the appeal of forming an LLC.

When the members consider the topic at hand to be “not a big deal” a formal vote is not required.

Practically speaking, these are decisions made in the daily operation of the restaurant business. For example, getting approval for a new list of ice cream flavors. This can be accomplished by informing the other members.

For example, by CC-ing the other members in an email placing the order for the additional ice cream. If no objections are raised then the actions are considered to have been approved by the other members.

Formal Voting - Sometimes it is a big deal, and everyone needs to weigh in on the decision before moving forward.

In these cases, there are two ways that a member’s vote can be weighed. The way the LLC weighs member votes should be made clear in the operating agreement.

  • Per Capita - One vote per person. It’s a straight majority vote. For example, five members, five votes. Majority rules.
  • Interest Percentage - Each member’s vote weighs as much as their percent stake in the business. If I own 15% of the company each of my 15 shares vote “yes” or “no” with me. Vote passes or fails based on how the shares vote.

Read More: Choosing a Restaurant Business Structure

How to form a Restaurant LLC

Operating Agreement

Once you have chosen a state to file in, the first step is to write up the operating agreement.

This can be a simple or a complicated process depending on:

  • The number of members
  • How power is distributed
  • What obligations members have to the organization

The operating agreement is a contract between the LLC members. Through the operating agreement the state can see how the LLC is legally structured.

As an LLC member, the operating agreement gives you protection from liability. By specifying member roles and financial responsibilities it’s clear what everyone’s part in the LLC is.

Understanding More about Operating Agreements

Many states don’t require an operating agreement for an LLC. Regardless, it’s highly advisable that an LLC with more than one person uses an operating agreement.

Care should be taken to craft a suitable agreement between the restaurant’s founding members that takes into consideration that it’s better to have everything in writing.

When crafting an operating agreement, consider future legal issues and strive to clarify the internal organizational structure of your LLC ahead of time to avoid finger pointing down the road.

What should be included in the operating agreement?

One of the most important things to do is provide detail in the operating agreement as to what each member has contributed to the LLC, regarding:

  • Assets
  • Services
  • The size of each member’s ownership stake

The LLC members decide together how to compensate each other for their contributions.

In addition to ownership stake each member has in an LLC an agreed upon share in the profits or losses. This is called a “distributive share.”

Indeed, someone can own 50% of the LLC company and only 25% of the losses. If the other members have agreed to the arrangement, it should be detailed in the operating agreement.

LLCs, personal taxes and the operating agreement.

Come income tax time, typically the LLC passes the tax burden through to the individual owners.

It’s important to take this into account when writing the operating agreement, and to understand how it affects your own financial state.

Profits won’t always be taken out of the company every year. However, members of the LLC are required to personally pay income taxes on the company’s profits, proportional to their ownership stake.

The how, when and how much of the profits each member should expect to have distributed to them each should be spelled out, so that members can plan ahead with enough cash to cover their personal tax liability born out of the restaurant’s profitability.

Also, be sure to include the following information in your restaurant’s operating agreement:

  • What voting powers members have
  • How profit and loss are distributed to members
  • Each member’s stake in the restaurant
  • Rules for meetings and taking votes
  • Unilateral actions permitted by members
  • The specific management structure and hierarchy
  • Member’s rights and responsibilities

As a final note about operating agreements, make sure to cover eventualities. What happens if one of the members dies or is otherwise unable to fulfill their obligations to the organization?

Request a POS Demo Now!

Rezku POS for Full-service restaurants

Articles of Organization

This is the document filed with the state to officially form your LLC.

Most states require this document to be filed with the Secretary of State in the state you’re forming the restaurant LLC in. Some states have even created pre-built forms you can simply fill out. Otherwise, you’ll have to write your own.

The information included in the articles of organization varies between states.

The basic state requirements of the articles of organization are:

  • Company name
  • Address where the LLC is doing business
  • Name and address of the registered agent
  • A statement about the management and organizational structure of the LLC
  • The purpose of the LLC
  • The duration of the LLC
  • Signature(s) of members authorized to form the LLC

Additional State Requirements for LLCs

Since laws regarding limited liability companies are established through the state legislature, there is some variance between the laws governing LLCs from one state to the next. The ways in which states tax an LLC also differs between states.

Despite these differences, there is a lot in common state-to-state. For this guide we’ll focus on what is generally true, regardless of the particular state.

Filing Articles of Organization with the Secretary of State

When filing the articles of organization, the name of the company should have “LLC” at the end, or the state will add it automatically. It also must be a unique company name or the application will be rejected.

Choosing a Registered Agent

A registered agent must be designated by the members. This is the person who will receive information and notices directed to the LLC.

List the name and address to contact the registered agent. The registered agent can be a member of the LLC, a designated non-member or an authorized registered agent service.

Statement of Purpose

The LLC’s statement of purpose is a short description of why the members are forming an LLC and what you plan to accomplish as a business.

The statement of purpose can be considered a mission statement for the LLC. It can be specific or very general. For example, “to perform all legal acts permitted by limited liability companies” is acceptable as a statement of purpose.

Management Style

Indicate to the state if the LLC is going to be manager-managed. If you don’t specifically designate a manager-managed style the state will default it to a member managed LLC.

If you don’t want the restaurant’s legal entity to be considered by the state to be member-managed, it’s important to specify manager-managed when filing with the state.

You may be required to supply the names and addresses of each of your managers, under a manager-managed structure as well.

Read More: Choosing a Restaurant Business Structure

Principal Place of Business

This is pretty straightforward, it’s the headquarters of the LLC’s business operations. If you only have one restaurant location, it will be the address you’re operating out of.

However, if you have multiple restaurant locations, you would list the office address that you manage all the sites in the restaurant chain from.

Authorized Signatures

All authorized members sign, filing with the state to form an LLC.

You will have specified in the operating agreement which members of the LLC are authorized to sign papers on behalf of the organization. This is important because by default any single member could obligate the others for things they may not want to be liable for.

However, if the intent is for all members to have an equal partnership, in a member-managed LLC, having all members sign shows solidarity of intent in the formation of the LLC.

Duration

Most state filings ask for the LLC’s intended duration. Some states do not allow a perpetual LLC.

Some states allow an indefinite duration that will only dissolve the LLC if one of the members leaves or dies.

However, if permitted by the state you may define the LLC as perpetual. Doing so makes it clear not to dissolve the LLC after a period or if members leave.

If the LLC is to be dissolved by the state after meeting the conditions, you can file for an LLC life extension to sidestep this.

Additional State Differences

Some states don’t publicly release the names of LLC members. If you form your LLC in a state that doesn’t publicly release the identities of the LLC members, this is considered an “anonymous LLC.”

In every other way it is no different than a regular LLC. But it’s worth noting that some states provide anonymous LLCs if you’re concerned about privacy.

You can form an LLC in any state. However, if it’s not your home state or the state the LLC operates out of keep in mind that your LLC will be subject to the tax laws, fees and regulations for both the state you file in and the one you're doing business in.

While many states allow minors to be members of an LLC, some states require that all LLC members must be over 18 years old.

Request a POS Demo Now!

Rezku POS for Full-service restaurants

Costs of Forming an LLC

Filing

The fees vary greatly from state to state, from $40 to almost $600. Most states are somewhere in the middle, around $200. To get the exact rate, check the secretary of state’s website for the state you are forming your LLC in.

Certified Copies

For tax purposes, you may need the state to send you certified copies of your documents, once approved. There are additional fees that the state will charge for this service.

Re-filing

If there is a problem with your filing that causes rejection you’ll be subject to re-filing fees. It could be your LLC name or something else, but make sure you meet all the state requirements before filing to avoid this avoidable cost.

Trademark or Copyright

No one is going to eat at a restaurant named “ABC American Restaurants LLC.” So you’ll need to pay additional fees to register a trademark, or name mark for your actual restaurant name.

Annual Fees

Franchise taxes and license fees are charged by many states. Like the initial filing fees to form an LLC these costs vary greatly from state to state. You must pay these fees every year to stay in good standing and maintain the liability protection the LLC provides.

Notification Publishing

In the age of the internet it’s an archaic practice. But in many states it is still required to publish a notice of LLC formation in a local newspaper. The newspaper must be on a list of approved publications provided by the county clerk’s office.

Depending on the state, the notification may have to run for months. The fees charged by the newspapers can be quite high for this service. Some are over $1,000. So make sure to budget for this cost when forming your restaurant LLC.

Read More: Choosing a Restaurant Business Structure

Registered Agents

In every state your LLC operates you’ll need to pay a registered agent to maintain your presence in that state. This goes for states you do business in but are not located in as well. Fees for a registered agent are around $100 a year.

Filing Assistance

You might find it beneficial to seek assistance with your filing, especially if it’s your first time forming an LLC.

Basic online LLC filing assistance starts around $50 and goes up from there. Fees depend on how much assistance you require. However, this can be a valuable service if it means saving the cost of a re-file.

For more complicated filings you may enlist an attorney. Attorney fees are as you would expect, more costly.

If you have a complex arrangement between members, the ownership agreement is complicated or it is a manager-managed LLC it may be a good idea to have an LLC attorney help make sure everything is in order.

LLCs and Federal Taxes

LLCs are formed under the jurisdiction of state governments. Interestingly, they are not technically acknowledged by the IRS. The IRS refers to LLCs with the term “disregarded entity.”

For tax purposes, you have options when it comes to how you and the other members of your restaurant company want to file.

Federal Tax Filing as a Sole Proprietor / Partnership

When you file with the IRS as a sole proprietorship or as a partnership the LLC’s tax obligations are treated as a “pass through.” This means that the tax burden falls on the individual LLC members. Taxes for the LLC are filed on their personal tax returns.

For a single member LLC, the IRS views it as a sole proprietorship. For multi-member LLCs the IRS regards it as a partnership.

Things to Consider When Filing as a “pass through”

Because each member’s share of the profits (or losses) of the company are taxed at their individual tax rate, it can prove frustrating in some instances, since the so-called profits of the business are taxed in the individual’s tax return. However, those profits may not be distributed to the members each year.

Businesses will often retain profits to invest back into operations and secure the financial health of the LLC.

Regardless of payout, the IRS will expect you to personally pay taxes on the profit created by the restaurant.

Filing as an S Corp

The IRS gives LLCs the option to file as an S Corp. Like a partnership or a sole proprietorship, an S Corp is a pass-through entity for tax liability. Members’ tax obligations are based on how many shares of the company they own.

The potential benefit of filing as an S Corp comes in the way employment taxes are handled. When taxed as a sole proprietor, you must pay 100% of the employment tax. This is also called “the self-employment tax.”

Filing as an S Corp drops the employment tax obligation to half personal, and half paid by the LLC.

Another benefit of filing with the IRS as an S Corp is when members take profit out of the company. Some of the profit can be paid out in the form of a distribution. A distribution is not subject to employment taxes.

There are restrictions in place by the IRS regarding distributions:

  • There can’t be any foreign investors in the LLC
  • All the partners must be individual people
  • Not legal entities such as other LLCs, corporations or partnerships

If you think you might want to file for federal taxes as an S Corp in the future, these restrictions should be taken into account when forming an LLC:

To file for federal taxes as an S Corp, you will:

  • File an election document
  • Complete IRS form 1120S to report profits, losses, deductions, and credits for the year
  • A Form K-1 is given to each LLC member detailing their share of ownership of the assets and liabilities of the LLC, reported on form 1120S
  • For tax purposes, the LLC members are now referred to as “shareholders”. This is because the LLC is now regarded as a corporation by the IRS
  • Each LLC member files a Schedule E form with their 1040 personal tax return.

As you can see, filing as an S Corp requires some additional work to go into it. But the financial benefit could outweigh the cost of compliance. You will have to make that determination.

Request a POS Demo Now!

Rezku POS for Full-service restaurants

Filing as a Corporation (C Corp)

If the LLC members plan to retain a significant portion of the profits in the company rather than paying it out, you may want to file as a C Corp (corporation).

If you file as a C Corp with the IRS, the LLC is responsible for paying taxes on profits. It is no longer considered a “pass through.” Members are not personally liable for the tax obligation of the LLC.

In this case, taxes are paid at the appropriate corporate tax rate, and members are taxed only on the wage they receive. Like filing as an S Corp, there is no “self-employment tax”. The corporation pays half of the employment tax.

To file with the IRS as a C Corp:

  • Members must vote to approve
  • File IRS Form 8832*
  • File IRS Form 1120**
  • File a quarterly employer tax return, IRS Form 941

* Once Form 8832 is filed it’s only retroactive 75 days before filling. If the tax period had already started before that deadline, you’ll need to file taxes as a partnership for the period up to the period where Form 8832 takes effect.

**Because IRS tax rules for corporations are different, when you file form 1120 your IRS deadline to file may change. For corporations, taxes must be filed the 15th day of the third month following the close of the tax year.

Before choosing to file as a corporation, keep in mind the dynamic called “double taxation”. Profits are taxed first when the corporation files with the IRS and then again when it taxes as income when members file their personal taxes at the end of the year.

You and the other restaurant LLC members will want to carefully weigh the costs and the benefits of this arrangement. It’s probably best to consult an experienced accountant before you make a decision.

Read More: Choosing a Restaurant Business Structure

Summary

Forming an LLC is often the best choice for individual restaurant owners and restaurant partners. It is informal, flexible and less costly than forming a corporation, while also providing some protection from liability and making it easier to get loans.

Forming an LLC is done at the state level, and each state has specific requirements for forming an LLC. Costs also vary widely, so check with the secretary of state in the state in which you want to form your LLC for a complete list of requirements.

The IRS does not recognize the LLC as a valid entity for tax purposes. You have the choice of filing taxes on your personal income taxes, or filing with the IRS as an S Corp or a C Corp. However, this can add complexity and additional regulations that diminish some of the appeal of forming an LLC in the first place.

This guide to starting a restaurant LLC is part of an in-depth course on how to start a restaurant, brought to you by Rezku. Rezku is an industry leading restaurant management technology company dedicated to helping restaurant groups, nightclubs and bars with innovative solutions to real problems. Our products include front of house management, online reservations, point of sale, membership and loyalty programs and more.

Copyright © 2018 Guest Innovations, Inc. All Rights Reserved.

Rezku is a trademark of Guest Innovations, Inc. “Making Restaurants More” is a service mark of Guest Innovations, Inc. iPad, iPhone, and iPod Touch are the trademarks of Apple Inc., registered in the U.S. and other countries. App Store is a service mark of Apple, Inc. Android is a registered trademark of Google. Windows is a registered trademark of Microsoft. Other logos & trade names are the property of their respective owners. Use of Rezku POS is subject to Terms of Use.