This is a guest post from Nellie Akalp, Founder / CEO of CorpNet.com:
Q: Why should a restaurant be anything other than a “Sole Proprietor?”
A: The main issue with being a sole proprietor is the personal liability. With sole proprietorships and partnerships, there’s no legal separation between the business owner and the business. So, if a customer or employee sues your business, any of your personal assets (savings, property, etc.) can be used in the court’s judgment. When you form a legal business structure, such as a corporation or LLC (Limited Liability Company), this creates a shield between you and your business, and helps protect your personal assets should something happen in your business.
There are some business ventures, such as blogging, that can have low enough risk to consider staying a sole proprietorship. However, a restaurant owner is exposed to considerable risk in running the business and should always look to minimize his or her personal liability.
Q: Is an S, an LLC or a C Corp the best structure for an independent restaurant?
A: There’s no single business structure that is best for every restaurant and restaurant owner. Here are a few things to keep in mind when determining which structure is right for you. The LLC entails less paperwork and business formality than the corporation (S or C). If you prefer to keep things simple, than the LLC is a good choice.
A C Corporation pays its own taxes on the profits, while an LLC and S Corporation are “pass-through” entities. With the LLC and S Corp, the business owners pay taxes on any business profits on their personal tax return. You can compare corporate and personal tax rate tables to see if one gives you an advantage. Also, if you prefer to take profits out of the business, then an LLC or S Corporation will most likely be better than a C Corporation.
Q: How hard is it to get a corporation filed?
A: It is very easy to file a corporation today. The paperwork is called “Articles of Incorporation” and includes basic information about your business like company name, address, officers and directors, and then stock information like number of shares and par value. Note that you do not have stock with an LLC. A reputable document filing service such as my company can handle all the paperwork for you. Corpnet provides business filing services required for a variety of business needs such as forming a Corporation or Limited Liability Company (LLC), filing a DBA/Fictitious Business Name, Trademark Search and Registration services, and much more across all 50 states.
Q: What do I have to do every single year at minimum to keep my corporation “in good standing?”
A: The exact requirements depend on your business structure (corporation vs. LLC) and the state where you formed the business. Generally speaking, you need to file your federal and state tax return, as well as an Annual Report with the state (a few states do not require this). Corporations also need to hold an Annual Meeting for shareholders and keep meeting minutes. You also need to stay current with any local permits or licenses (i.e. health department).
Q: What does “Resident Agent” mean?
A: A Registered Agent serves as the official address to receive important legal and tax documents for the business. When you incorporate your business or register to conduct business in a state, you need an official address or registered agent in that state. If you have a physical address in the state, you can act as your own registered agent for the business, but this makes your address public record. Furthermore, the registered agent always needs to be available during normal business hours to accept important documents from the state.
Using a third-party service for a registered agent ensures that you will never miss an important document. It’s a relatively low cost service, and is often included for free for a certain duration when you incorporate your business with an online legal filing company.
Q: Do I have to have an attorney to create a corporation?
A: The majority of entrepreneurs no longer need to hire an attorney to create a corporation. You can find a reputable online legal filing company to handle the paperwork for a fraction of the cost. If your corporation needs are complicated, for example you are dealing with millions of dollars in assets or have a complex stock structure, then it is best to hire an attorney.
Some entrepreneurs choose to speak with a tax advisor first to determine the best business structure to optimize their taxes, and then form that business through an online legal filing company.
Q: What’s the difference between an “entity” and a corporation?
A: An “entity” refers to a business that is considered separate from its owners. For example, legal business entities file their own taxes, pay salaries, can file for bankruptcy, and be sued by third parties. The two most common types of entities are the Corporation and the LLC (Limited Liability Company). So, a Corporation is one type of legal entity. Keep in mind that sole proprietorships and partnerships are not treated as separate entities from their owners.
Q: Are there any tax benefits to having a corporation?
A: There are a couple of tax advantages for corporations. You may want to speak with a tax professional to figure out how they apply to your situation. For example, a corporation may be able to deduct health insurance for families, as well as retirement plans.
One other key advantage is that only salaries (and not profits that are distributed as dividends) are subject to self-employment/FICA tax. This could potentially save you thousands in taxes if you structure your salaries and profits properly. Again, a conversation with a tax professional can shed some light on what’s best for you.
Q: What does “piercing the corporate veil” mean?
A: When you form a legal entity like a corporation or LLC, this creates a “corporate veil” that helps shield your personal assets from the business. However, if you fail to keep your business in good standing with the state, then this corporate veil is pierced, and your personal assets can be at risk if your business is sued or can’t pay its bills. Common reasons for falling out of good standing include: not paying your business’ state or federal taxes, or failing to file your annual report with the state.
Q: If I have more than one location, should I have different corporations for each?
A: There are several ways you can structure your businesses if you have multiple locations. One of the key things you want to do is to limit the liability, meaning if one location is sued, you do not want to put the other locations at risk. One strategy is to have one corporation as the main holding company, and then structure each location under the holding company as its own corporation or LLC. However, other business owners opt to create separate corporations for each location and forego a holding company. Consulting with a tax professional can help you understand the tax and legal implications for each approach.
Q: Is it smart to have a “holdings” or “management” corporation over everything else?
A: A lot of large restaurants do opt to set up a corporation or LLC as a holding company and then set up each location as a corporation or LLC under the main holding company. This approach helps shield the assets of one location from any issues with another location. The tax and legal implications get complex for this scenario, so you may want to consult with a tax professional for the best way to structure your holding company and its subsidiaries.
Q: Can an employee of one corporation sue me in the other corporation?
A: Generally speaking, no. Corporations are considered separate legal entities. An employee can only sue the corporation that’s involved with the particular grievance or incident.
Nellie Akalp is a serial entrepreneur, small business advocate, speaker and author. Through the various “Do-It-Yourself” and “Business-Startup” services she has founded since 1997, she has formed over 200,000 corporations and LLCs for small business owners.
Her last company was acquired by Intuit in 2005. Today, she and her husband, Phil, operate CorpNet.com where they help entrepreneurs start a business, Incorporate, Form an LLC, set up Sole Proprietorships (DBAs) and maintain a business in compliance with state filing requirements for a new or existing business.
Nellie shares her expert tips with readers at Forbes, Entrepreneur and Mashable and is a regular guest expert on the Fox Small Business Center. She was named a Top 100 Small Business Influencer in 2012, 2013, and 2014 by Small Business Trends. Nellie has presented a workshop at Small Biz Expo and sat down with members of Girls in Tech, General Assembly and more to inspire and motivate others to make their business dreams a reality.