As a restaurant owner, the registration you choose for your business is an important decision. You can register your business as a Limited Liability Company or a sole proprietorship; whatever you choose can negatively or positively affect you. The choice depends on what you need for your restaurant business. Although the two have several similarities, they also differ. An LLC gives your business a separate entity, while sole proprietorship means that you and your business are the same legal entity.
So, what are the key differences for restaurant owner registration options?
Consider the budget
Getting an LLC is expensive since you’ll need to do it through the secretary of state’s office. If you choose this option, it will cost you $300. On the other hand, if you choose a sole proprietorship, you’d pay $25 for filing an assumed name certificate. Whatever you choose, you will have to incur these costs as your business expense. This would officially be the start of your restaurant business.
Choosing an LLC is an excellent way of protecting your assets since your restaurant will be a separate legal entity. It’s a good way of protecting your personal property, especially if you’re unable to pay your restaurant debts. If you go with the sole proprietorship, your personal property such as your car, home and personal savings can be at risk because your creditors can hold you and your business liable as one entity.
Having a good credit score will help your business, especially when you want to improve your restaurant or open another one. If you have an LLC, your business will have its own credit rating separate from your own. Your LLC restaurant will have its credit rating during a lending decision, and if it’s good, you can take advantage of it. However, if you choose to be a sole proprietor, then financial institutions will use your credit information as a reference before lending you any money. Unless you have a very good credit rating, this would mean that an LLC would be more appropriate to give you the chance to grow your business.
If you choose an LLC, your restaurant considered an independent unit. In contrast, when you choose a sole proprietorship, you will have to report your business taxes with your income. However, according to the IRS website, if you are the sole member/owner of an LLC, you can elect to be taxed as a corporation, partnership, or sole proprietorship. Whatever option you choose will determine if you will be double-taxed or if your profits will only be taxed once as part of your income tax return.
Ideally, we would advise you to get taxed as a business; then, once you receive your share as an owner, you can be taxed from that.
The IRS is more likely to audit you as a sole proprietor because the assumption is that restaurants have multiple cash transactions in a day, and the owners may end up understating their earnings. When you have an LLC, you may be subjected to random audits. Still, they are assumed not to understate their earnings or underreporting.
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