What is the Best Entity Structuring for Multi-Unit Restaurants?
What is the Best Entity Structuring for Multi-Unit Restaurants?
“How should I set up my multi-location restaurant group?” We encounter this question frequently. Or sometimes, it’s the classic, “My brother-in-law absolutely insists I should become an S Corporation.” Now, before we delve into the intricacies 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, it’s surprising how often we’re asked this question. To begin, 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, the big question is: Should you form a separate entity for each location or separate them 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: All Your Eggs in One Basket
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, or another form) owns and operates all your locations. 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. This setup provides more operational control, as you don’t have to navigate the complexities of multiple partners or managers.
But Beware: The Liability
However, there’s a substantial drawback: 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.
The Dilemma of Multi-Unit Restaurants
Additionally, tax implications come into play. Consider whether the income is subject to self-employment tax or double taxation, as C Corporations are taxed on profits and the dividends you take from the corporation. If you opt for a single-entity approach, our general recommendation is an S Corporation if you’re not in Tennessee, and an LLC Taxed as a Partnership if you are in Tennessee. Tennessee is a little different; they don’t play as nicely with S Corporations due to self-employment tax, and they tax the profits from an S Corp.
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. But 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?
On the other hand, we generally recommend the multi-entity structure for multi-unit restaurants. This involves establishing a separate legal entity for each location or 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. The primary advantage of this approach is liability protection. If issues arise at one location, it won’t 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.
However, there are also some drawbacks to this structure. 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 Setup
The typical structure is a group of partners or shareholders who own the main holding entity. Typically, in Tennessee, this is an LLC Taxed as a Partnership. Each location is a separate Single Member LLC. Since this is wholly owned by the main holding entity, it is what is called a disregarded entity for Federal Income Tax purposes. This means no separate Federal Income Tax return for this entity as this entity is reported on the one primary holding entity’s tax return.
Simplifying Employee Management
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. It means 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, rather than 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 Brinks 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.
Navigating the intricacies of business structure can be challenging, especially if you’ve been following the same path for a long time. If you’re seeking guidance on how to initiate this transition or have further questions, don’t hesitate to take the next step. Schedule a call with us, and let’s kickstart the conversation so you can start becoming one step better every day.
For owners juggling multiple locations, legal entities, or operations across various states, we’ve got the perfect guide for you. Dive into this article that unravels the complexities when to separate your legal entities. It’s a must-read to ensure your business structure aligns with your goals.