As a restaurant owner, you've probably received all sorts of advice from people who think they know best. Sometimes, it’s, “My brother-in-law absolutely insists I should become an S Corporation.”
Before we jump into the details of business structures, let’s consider how much wisdom your dear brother-in-law could really have… he did get married to your sister, after all!
All kidding aside, as any good accountant would tell you, the answer isn’t one-size-fits-all.
It depends on various factors, and that’s not the golden ticket answer you were hoping for when you first Googled this, but hey, it’s the real deal. Where you set up shop, what your plans for growth are, and how you plan to fund your journey all come into play.
Single Entity vs. Multi-Entity Structure
So, if you've got a restaurant with multiple locations, you might begin to wonder if your brother-in-law might be right. From a business perspective, is it better to form a separate entity for each location, or should you keep them all under one umbrella?
Let’s explore both options with their pros and cons and provide some practical tips for making the right choice.
*But before we get to that, we want to remind you that we are not attorneys, and this is not legal advice. You should always consult a qualified attorney before deciding your business structure. However, here is some practical advice to run by your other brother-in-law before deciding.
Single-Entity Structure for Restaurants
One of the most common approaches for multi-unit restaurants is the single-entity structure.
In this model, one entity (whether a sole proprietorship, S Corporation, LLC, etc.) owns and operates all your locations.
Pros of Single-Entity Structure
All Your Eggs In One Basket
The primary advantage is simplicity. You only need to file one tax return, maintain one set of financial statements, and handle one set of legal documents.
With a single entity, you have centralized control over your operations, which can simplify decision-making and management.
Cons of Single-Entity Structure
Beware Of The Liability
If something goes wrong at one location, such as a lawsuit, fire, or health violation, your entire business could be at risk: Not only the assets of that particular location but also those of all your other locations and even your personal assets might be in jeopardy.
Consider the Tax Implications
The income your business earns could be subject to different types of taxes depending on your business structure.
For example, C Corporations are taxed on profits, and then the money you take out of the corporation is taxed again, leading to double taxation which isn't ideal.
If you want to operate only one entity, we generally recommend an S Corporation. This is because an S Corporation allows income to flow through to the owners' personal tax returns, avoiding double taxation.
Tennessee imposes additional taxes on S Corporation profits. S Corporations also have a cap on the number of shareholders, maxing out at 100. Plus, you’ve got to divvy up the profits strictly based on each shareholder’s ownership share.
Therefore, in Tennessee, an LLC taxed as a partnership is often better.
With LLCs taxed as a Partnership, you have more flexibility. You can distribute income according to your operating agreement and the agreement among your members.
Now, in some states, they treat S Corporations much like Partnerships, allowing the income to flow to individual shareholders. The tax happens at the individual level, not at the entity level – but not in Tennessee. So, in Tennessee, you might need to jump through some extra hoops to bridge the tax gap.
Our suggestion? Why not sidestep that challenge if you can?
Multi-Entity Structure for Restaurants
An alternate setup for multi-unit restaurants is the multi-entity structure, which is what we generally recommend. This means that you have a separate legal entity for each location or each group of locations.
For instance, you could create one entity for your downtown locations and another for suburban areas. Typically, we recommend using separate LLCs for each location, all wholly owned by a main entity, whether it’s an LLC taxed as a partnership or an LLC taxed as an S Corporation.
Pros of Multi-Entity Structure
The primary advantage of this approach is liability protection. If something goes wrong at one of your locations, the damage will be limited to that entity. It will not affect your other entities or personal assets.
This structure allows you to tailor each entity to the specific needs and preferences of its location, such as menus, prices, or branding.
Cons of Multi-Entity Structure
There are also some drawbacks to this structure and the main one is complexity.
You must file multiple tax returns, financial statements, and numerous legal documents. You also may have to deal with various partners or managers, which could lead to conflicts or inefficiencies.
The Typical Structure for Multi-Unit Restaurants
The common setup involves a group of partners or shareholders owning a main holding entity.
In Tennessee, this is usually an LLC taxed as a partnership.
Each restaurant location operates as a separate Single Member LLC, wholly owned by the main holding entity. This arrangement makes each location a disregarded entity for Federal Income Tax purposes. No separate Federal Income Tax return is needed for each location since the entity is reported on the primary holding entity's tax return.
A Smart Move: Creating a Seperate LLC for Your Employees
Another idea we often recommend is creating a separate LLC for employees with similar roles. This would typically include employees who work near a group of restaurants, within the same state, or within a similar concept.
This approach can simplify your human resources management. You only need to deal with overtime rules for employees working in multiple locations, file one federal payroll tax return, and submit one state unemployment return for the states where you operate. No more wrestling with paperwork for each individual entity.
This setup is all about keeping things easy to manage and safeguarding your interests. Plus, it offers flexibility for future partnerships. You can bring in partners for specific units rather than the entire group. And when the time comes to sell off a location, it’s a smoother process – ideal for when you’ve got a potential investor ready to roll in with a Brink’s truck.
The Bottom Line: Making the Right Choice
Choosing the right entity structure for your multi-unit restaurant is no simple task. It requires careful planning and professional guidance. This is a topic we like to work through with our clients in collaboration with their attorneys, as there’s no one-size-fits-all answer. Making the wrong decision and having to make corrections can be expensive and time-consuming.
Here's What You Should Take Away:
Single-Entity Structure: It's simple and easy to manage but comes with higher liability risks. Perfect if you want straightforward control over all your locations.
Multi-Entity Structure: Offers better liability protection and flexibility but is more complex and needs careful planning. Great for protecting each location separately and catering to different operational needs.
Running a restaurant is tough enough without financial stress. To help ease that burden, our article on Successful Accounting Practices for Restaurants covers everything from managing cash flow and tracking expenses to tax tips and financial planning.
Want to talk through your options? Schedule a call with our team to find the best structure for your multi-unit restaurants.
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