You may be eager to start a restaurant business and serve delicious food. But then you need to plan your business structure. It will be based mostly on the business type, the number of investors and source of funds or loans. It is vital to select the most appropriate business structure. It will have a greater say on your taxes, attracting investors or borrowing money. It may also alter outcome in case you are to deal with some lawsuit.
5 Types of Restaurant Ownership Structures
Several ways are present to organize your ownership structure and business. However, not every type might fit the food service industry. But you should be aware of the five types.
1. Sole proprietorships:
It is among the popular business types in today’s food service industry. Here, a single individual owns the business. Having simple structure, it is common among family owned businesses and small restaurants.
Pros:
- Sole owner has full control over this type of business. Hence, decisions/changes can be made as per their discretion.
- It is the most inexpensive, easiest structure to establish.
- Business gets taxed as owner’s personal taxes. Therefore, tax does not have to be filed twice.
Cons
- In sole proprietorships, the owner has to bear all responsibilities that can be stressful.
- No legal separation between business and owner. Hence, owner is held liable personally for all business obligations and debts.
2. Partnership
Two or more people start this business with each one contributing connections, expertise or money. They share both losses and profits incurred by the business.
Pros
- They bring different expertise and skills to the business like check background, marketing skills, etc.
- They share finances.
- Easy to form and inexpensive.
Cons
- This form of business is jointly owned. Hence, each partner has to share the profits, thus making less money.
- Disagreements might make it tough to derive into agreements especially while making crucial decisions.
- Both are held personally liable to pay debts and meet business obligations.
3. LLC (Limited Liability Corporations)
This legal, independent entity combines benefits offered by partnership and corporation. However, it can be tough to establish and time consuming. They are commonly availed by large establishments and chains having multiple franchises.
Pros
- Fewer profit sharing restrictions. Members may distribute business profits as deemed fit.
- Less documentation and record keeping including fewer startup costs.
- Limited Liability Corporations members stay protected from all personal liabilities for incurred business debts or wrong decisions.
Cons
- Entire net income is subjected to self-employment tax.
- Members are stated to be self-employed. Hence, need to pay self-employment tax contributions.
- Business dissolves as a member leaves, thus compelling others to meet remaining business obligations.
4. Cooperatives
It is also referred to as co-ops are established as several people having similar professional goals start a business. It offers a more collaborative structure and is common in grocery stores, farmers market or food production business.
Pros
- Discounts availed on services, materials and supplies.
- Several government sponsored programs offer grants.
- Surplus earnings refunded to members do not get taxed.
Cons
- Members not participating might cause decline in business.
- Member cooperation and involvement necessary.
5. C Corporations
This independent entity is taxed separately and a favorite for restaurant business among large chains. Different shareholders make this business. It requires lots of money, documentation and effort. Assets worth millions are desired.
Pros
- Separate entity thus protecting personal assets of shareholders from legal actions or business debts.
- Taxes separately filed.
- Funds can be raised easily through stock sale.
Cons
- Additional documentation will be necessary as it is highly regulated by local, state and federal agencies.
- May be twice taxed.
- Time consuming and involves a fortune to start/operate.
Getting to know the above Restaurant Ownership Structures will help you decide the right one to start a restaurant.
