Potential customers aren’t the only ones who will need to know about your restaurant. The government will also need to know about your restaurant so you can operate legally.
You’ll need to register your business with several levels of government – but before you do that, you’ll need to know what type of business you’ll be running.
Here are several business structures to consider:
- Sole proprietorship
- Partnership
- Corporation
- Limited liability company (LLC)
In this section, we’ll tell you about some of the advantages and disadvantages to each business structure, so you can make an informed decision about how to set up your business. Then we’ll tell you how to register a restaurant business with the required levels of government.
Remember: Always talk to a tax professional and a lawyer about which business structure is best for you. This resource is not meant to replace legal and tax advice. Read more about hiring professional help here.
Restaurant Business Structure
The first step to registering your business is determining its legal structure. So before we tell you how to register your business, we’re going to describe the structures you’ll want to consider, their advantages, and their disadvantages.
Sole proprietorship
A sole proprietorship is the most popular type of business.
You’re the owner, you keep the profit, and you’re responsible for the debt. It’s just you, your business, and a whole wide world of possibilities. More than 20 million sole proprietorships operate in the United States and Canada.
With a sole proprietorship, there is no legal separation between you and your business. Your business is considered an extension of you, and you’re personally responsible for any liabilities.
Advantages
- You keep all the profits of your business
- You make all the decisions about your business
- Registering your business is cheap and easy
- There is no need to file a separate business tax return
- You can deduct expenses from operating your business from your taxes (travel expenses, gas expenses, advertising, etc.)
- You can deduct business losses against your personal income
- You’re within a lower tax bracket when profits are low
Disadvantages
- You assume all the risk and liabilities associated with your business
- Your business debts may affect your personal credit and assets
- If your business is profitable, you are personally within a higher tax bracket
- If your business is sued, you are being sued – and your personal assets (including your home and any other assets registered in your name) could be seized to cover the damages
- All your business income must be reported as personal income
- Raising capital may be more difficult
- Sole proprietorships may be more difficult to sell, as customer loyalty may remain with the owner
- Death or long term illness of the owner can make the business worthless
Partnership
A partnership is a business with two or more owners who pool their resources and share responsibilities.
Partnerships are flexible in how they can be established, and “legal entities” that own the business can be individuals, corporations, or trusts.
Partnerships don’t necessarily need to be determined by monetary value: partners may contribute skills, labor, or property. While each partner shares the same level of liability, however, they don’t necessarily share profits or losses equally. Shares are determined by partnership agreements, which are drafted by lawyers.
A general partnership shouldn’t be confused with a limited partnership in a restaurant business structure, which is comprised of partners who don’t manage the business and aren’t liable for anything more than their original investment. And while a general partnership can have only general partners, a limited partnership can have general partners and limited partners.
Advantages
- Shared costs and liability among partners
- Shared skill sets among partners
- Registering your business is cheap and easy
- No need to file a separate business tax return: you claim your shares of the business on your personal tax return
- You can deduct expenses from operating your business from your taxes (travel expenses, gas expenses, advertising, etc.)
- You can deduct business losses against your personal income
- You’re within a lower tax bracket when profits are low
Disadvantages
- You and your partners assume all the risk and liabilities associated with your business
- Your business debts may affect yours and your partners’ personal credit and assets
- If your business is profitable, you and your partners are personally within a higher tax bracket
- If your business is sued, you and your partners are being sued – and your personal assets (including your home and any other assets registered in your name) could be seized to cover the damages
- All your business income must be reported as personal income
- You may find it difficult to find good partners
- You may clash with your partners on business decisions
- You are personally responsible for the business decisions of your partner(s), even if they are made without your knowledge
Corporation
If you don’t want your personal assets attached to your business, you can create a corporation, another type of restaurant business structure.
A corporation is a separate legal entity from its owner(s). Financing is usually easier to secure for a corporation as opposed to a sole proprietorship or partnership, as investors and lenders are usually more comfortable investing in a company that isn’t attached to personal liability.
When you create a corporation, you’re creating a share structure. Each owner is issued a certain number of shares based on their percentage of ownership.
There are two kinds of corporations: private and public. A public corporation trades shares on stock exchanges, like the New York Stock Exchange (NYSE) or the Toronto Stock Exchange (TSE). A private corporation is not traded publicly.
Advantages
- A corporation is a separate legal entity from its owners
- You and other owners can’t be held personally liable for company debts or obligations
- You can transfer ownership of a corporation
- A corporation exists after owners leave
- A corporation can raise capital and financing much more easily
- Taxes may be lower for corporations, depending on where they are located
Disadvantages
- A corporation is expensive and complicated to establish
- Corporations are closely regulated by governments
- Corporations require extensive corporate records, including government documentation
- You may encounter conflict between shareholders and directors
- You may be required to prove residency or citizenship of directors
Limited Liability Company (LLC)
A limited liability company (LLC) is a hybrid restaurant business structure that combines the properties of a corporation with those of a sole proprietorship or partnership.
An LLC is much easier to set up than a corporation, and members of an LLC can’t be held personally liable for the company’s debts. But in cases of fraud or when legal and reporting requirements haven’t been met, creditors may be able to target owners of an LLC.
Advantages
- Separation of business and personal assets
- Easier to set up than a corporation
- Owners are afforded a certain amount of liability protections
- No need to file a business tax return (but you need to file an informational tax return)
Disadvantages
- An LLC needs to be dissolved upon the death or bankruptcy of a member
- Your business would not be able to become a publicly traded company
How to Register Your Restaurant as a Business
Now that you know your options, we’ll describe how to register a restaurant business as a sole proprietor or corporation. (Partnerships are established similarly to sole proprietorships, and LLCs are established similar to corporations. Speak to a lawyer about the details of both.)
How to register a sole proprietorship
Visit your county or city’s license center online; a quick Google search of your county or city name plus “business license” should bring up a government website with a thorough breakdown of how you can register and access to the forms you’ll need to complete. As a sole proprietor, you’ll need to register a Business Certificate (or Certificate of Assumed Name) with your county clerk’s office where your business is located.
When learning how to register a restaurant business, investigate two costs: up-front registration fees and annual renewal fees. Some cities require restaurants to pay a flat yearly fee, while others require payment of a percentage of sales.
First you’ll need to determine whether the desired name of your business is currently in use. You’ll need to complete a name search at the county clerk’s office, and they’ll conduct a search on their own once you apply.
Once you know that your business name is not in use, retrieve your forms, fill them out, and file online or in person. Some cities require you to submit applications for other permits and licenses at the same time, so make sure to investigate whether you need to submit forms other than your business license application.
How to incorporate your restaurant business
U.S.
In the United States, businesses are incorporated at the state level.
The process to incorporate is different from state to state, but you can count on having to follow some general steps. First you’ll need to conduct a business name search with your state’s registry to see if it’s available. You may need to fill out a form to reserve the name for a period of time, while your application is being processed.
You’ll then need to file formation documents with what is usually your Secretary of State. Fees vary from state to state.
You’ll then need a Federal Tax Identification Number or Employer Identification Number (EIN), which is a Social Security number for a business. This is what the Internal Revenue Service (IRS) uses to identify the business for tax purposes. An EIN is free from the IRS.
Canada
In Canada, you can incorporate your business federally and/or provincially.
First, where will your restaurant be operating? If you’re planning to operate only in one province, you may want to only incorporate with your provincial government. If you’re planning to operate within multiple provinces, however, you’ll need to incorporate your business at the federal level and the provincial level.
Remember to keep the future in mind here. When you opt for federal incorporation, your business name is protected across Canada, even if there are other restaurants operating under the same name at the provincial level.
This isn’t the case for a provincial corporation, under which your name would only be protected in your home province. And if you wanted to incorporate within another province later, your name may already be taken in that area – which would mean you wouldn’t be allowed to operate under your own name in that province.
So why doesn’t everyone just incorporate on a federal level? Well, because it takes extra work and money to do so.
If you choose federal incorporation, you’ll also need to register your business in your home province or territory. Federal incorporation means more paperwork every year, since you’ll need to comply with federal corporate filings regulations and all filings required by your province.
Federal incorporation also costs more. The current filing fee for federal incorporation is $200 online and $250 through other means. The cost of a NUANS Name Search Report is $75 per search. To register your business provincially, you’ll need to pay added fees associated with registration and name searches.
Corporations Canada administers the CBCA (Canada Business Corporations Act). You can incorporate your business online, or get the forms you need to file by mail.
To incorporate federally you’ll need to submit the following documents:
- Articles of Incorporation
- Initial Registered Office Address and First Board of Directors
- A Nuans Name Search Report approving the name you’ve chosen for your restaurant.
See the Corporations Canada website for a complete list of fees for incorporation, annual returns, corporate amendments, etc.
You’ll also need to contact your Provincial Registrar. All provinces and territories have websites for online provincial incorporation.
Conclusion
While learning how to register a restaurant business may be relatively simple depending on its legal structure, the most important thing you can do during this process is consult a lawyer. A lawyer will be able to advise you on the intricacies of your business structure based on your long-term goals and needs, and they’ll ask you questions that are specifically related to the legalities of your concept. Don’t skip this process for the sake of saving money: consider it an investment in the long-term health of your business, so that you can operate smoothly and without any surprises come tax season.
