LLC vs. C-Corp for a Single Location Restaurant
Disclaimer: This post discusses general legal issues, but it does not constitute legal advice in any respect. This post is not a substitute for legal advice and is intended to generate discussion of various issues. No reader should act or refrain from acting on the basis of any information presented herein without seeking the advice of counsel. Cara Stone, LLP and the author expressly disclaims all liability in respect of any actions taken or not taken based on any contents of this post. The views expressed herein are personal opinion.
One of the first questions a new restaurant will encounter is whether to set up its concept as an LLC or a Corporation. Entity structure can be complex and relies heavily on the restaurant’s goal. Below, we explore some of the factors that owners should consider, including:
- Is the restaurant a single location, or does it plan to open multiple locations or concepts?
- Is the restaurant’s goal to make as much money as possible year after year, or does the restaurant eventually plan to sell to a private equity group?
- Does the restaurant plan to take on investors, and what are the expectations of those investors?
If the restaurant is a single-location concept, the restaurant group or restaurant’s founder often choose an LLC tax partnership or an LLC with S-Corp tax status. LLCs have pass-through taxation features, allowing the company’s revenue to be distributed to the owners and partners in a tax-advantageous way. The company does not pay any taxes, but each owner pays a tax on their share of income from the entity. This tax treatment prevents double taxation, which you would see with a C corporation.
A C corporation is common in restaurant groups that want to maximize their tax advantage at exit. In C Corporations, tax strategies allow shareholders to exclude up to $10 million in taxable gain. If the company has an exit, the tax advantage can result in a lot of income for the founders and investors. Generally, a multi-location concept is more likely to set out with a goal of selling the brand down the line.
The tax consequences of the restaurant’s entity type can be significant, so talk to your accountant about the advantages and disadvantages of each entity type.
Besides the taxation aspects, a significant factor that might drive this decision is whether the restaurant plans to take on investors for the location. In general, C-Corporation or LLC partnership status offers more flexibility when taking on investors because the company can create preferred equity or create agreements that govern how economics are shared. On the other hand, in an S corporation, there is only one equity class and no entity shareholders, which limits the ability to raise outside capital.
Every case is unique, and before making any decision, contact a practitioner with experience working with restaurants to discuss the pros and cons of these entities.
Disclaimer: This post discusses general legal issues, but it does not constitute legal advice in any respect. This post is not a substitute for legal advice and is intended to generate discussion of various issues. No reader should act or refrain from acting on the basis of any information presented herein without seeking the advice of counsel. Cara Stone, LLP and the author expressly disclaims all liability in respect of any actions taken or not taken based on any contents of this post. The views expressed herein are personal opinion.
One of the first questions a new restaurant will encounter is whether to set up its concept as an LLC or a Corporation. Entity structure can be complex and relies heavily on the restaurant’s goal. Below, we explore some of the factors that owners should consider, including:
- Is the restaurant a single location, or does it plan to open multiple locations or concepts?
- Is the restaurant’s goal to make as much money as possible year after year, or does the restaurant eventually plan to sell to a private equity group?
- Does the restaurant plan to take on investors, and what are the expectations of those investors?
If the restaurant is a single-location concept, the restaurant group or restaurant’s founder often choose an LLC tax partnership or an LLC with S-Corp tax status. LLCs have pass-through taxation features, allowing the company’s revenue to be distributed to the owners and partners in a tax-advantageous way. The company does not pay any taxes, but each owner pays a tax on their share of income from the entity. This tax treatment prevents double taxation, which you would see with a C corporation.
A C corporation is common in restaurant groups that want to maximize their tax advantage at exit. In C Corporations, tax strategies allow shareholders to exclude up to $10 million in taxable gain. If the company has an exit, the tax advantage can result in a lot of income for the founders and investors. Generally, a multi-location concept is more likely to set out with a goal of selling the brand down the line.
The tax consequences of the restaurant’s entity type can be significant, so talk to your accountant about the advantages and disadvantages of each entity type.
Besides the taxation aspects, a significant factor that might drive this decision is whether the restaurant plans to take on investors for the location. In general, C-Corporation or LLC partnership status offers more flexibility when taking on investors because the company can create preferred equity or create agreements that govern how economics are shared. On the other hand, in an S corporation, there is only one equity class and no entity shareholders, which limits the ability to raise outside capital.
Every case is unique, and before making any decision, contact a practitioner with experience working with restaurants to discuss the pros and cons of these entities.
