Should I Start an LLC for My Restaurant?

Starting a limited liability company (LLC) for your restaurant can provide several benefits.

Most importantly, an LLC structure offers limited liability to its owners, which can protect their personal assets from lawsuits and creditors.

For a restaurant, lawsuits can arise from things like customers suffering illness as a result of consuming your food or violating the terms of an agreement with one of your suppliers.

LLCs are also affordable, highly flexible (from a tax point-of-view), and can make your restaurant seem more credible.

Recommended: Use Northwest to form an LLC for $29 (plus state fees).

Do I Need an LLC for a Restaurant?

LLCs are a simple and inexpensive way to protect your personal assets and save money on taxes.

You should start an LLC when there's any risk involved in your business and/or when your business could benefit from tax options and increased credibility.

LLC Benefits for a Restaurant

By starting an LLC for your restaurant, you can:

Protect your savings, car, and house with limited liability protection
Have more tax benefits and options
Increase your business’s credibility

Limited Liability Protection

LLCs provide limited liability protection. This means your personal assets (e.g., car, house, bank account) are protected in the event your business is sued or if it defaults on a debt.

Restaurants will benefit from liability protection because food and beverage businesses, including restaurant businesses, face the risk of product liability, occupier’s liability, customer and employee injuries, trademark infringement, and financial data breaches.

Example 1: You put out an advertising campaign for your Mexican restaurant that implies that a rival Mexican restaurant makes inauthentic cuisine. In response, the competitor sues your restaurant for damages. In the ensuing lawsuit, you would be protected from being held personally liable to pay any damages.

Example 2: A customer is rushed to the hospital after consuming food at your restaurant and is diagnosed with severe food poisoning. Following this, he sues the business. If found liable, only the business assets will be affected.

Example 3: A group of customers claim that they were rudely insulted by one of your waitresses while taking their order. If they decide to file a lawsuit, your LLC may be liable to compensate, but your assets will be safe from the case.

An LLC will also protect your personal assets in the event of commercial bankruptcy or loan default.

To maintain your LLC's limited liability protection, you must maintain your LLC's corporate veil.

LLC Tax Benefits and Options for a Restaurant

LLCs, by default, are taxed as a pass-through entity, just like a sole proprietorship or partnership. This means that the business's net income passes through to the owner's individual tax return.

The business’s net income is then subject to income taxes (based on the owner's tax bracket) and self-employment taxes.

Sole proprietorships and partnerships are taxed in a similar way to LLCs, but they do not offer limited liability protection or other tax options.

S Corp Option for LLCs

An S corporation (S corp) is an IRS tax status that an LLC can elect. S corp status allows business owners to be treated as employees of the business (for tax purposes).

S corp tax status can reduce self-employment taxes and will allow business owners to contribute pre-tax dollars to 401k or health insurance premiums.

The S corp status requires that the business pay the employee-owner(s) a reasonable salary for the work they perform.

In addition, the business might need to spend more on accounting, bookkeeping, and payroll services. To offset these costs, you'd need to be saving about $2,000 a year on taxes.

We estimate that if a restaurant owner can pay themselves a reasonable salary and at least $10,000 in distributions each year, they could benefit from S corp status.

You can start an S corp when you form your LLC. Our How to Start an S Corp guide will lead you through the process.

Credibility and Consumer Trust

Restaurants rely on consumer trust. Credibility plays a key role in creating and maintaining any business.

Businesses gain consumer trust simply by forming an LLC.

A growing business can also benefit from the credibility of an LLC when applying for small business loans, grants, and credit.

Northwest will start an LLC for you for just $29 (plus state fees).

Get Started

How to Form an LLC

Forming an LLC is easy. There are two options for forming your LLC:

You can hire a professional LLC formation service to set up your LLC for a small fee
Or, you can choose your state from the list below to start an LLC yourself

Select Your State

For most new business owners, the best state to form an LLC in is the state where you live and where you plan to conduct your business.

Do LLCs Need Insurance?

All businesses need insurance to protect their business assets — even LLCs. This is because the limited liability protection from an LLC protects your personal assets, not your business assets.

Restaurants need insurance because of the liability that comes with selling consumable products. Allergic reactions, food poisoning and other incidents which can lead a client to take legal action against you, can be covered under the purview of business insurance.

Common Situations Business Insurance May Cover for a Restaurant

Example 1: One of your employees fails to put out a sign warning of a wet floor after mopping. A customer slips and falls, breaking her arm. She demands that your business pay for her medical treatment. Your general liability insurance will likely cover this expense.

Example 2: A server is rushing through the restaurant to get drink orders when she accidentally bumps a customer and knocks him over. He falls to the ground and breaks his wrist. He sues you for damages. Your general liability insurance will pay for your legal expenses, including the cost of a settlement if necessary.

Example 3: A back-of-the-house employee is hauling in a shipment of supplies on a dolly when he loses control of it. The dolly smashes into the luxury vehicle of a customer. Your general liability insurance should cover the cost of repairing the damage.

Other Types of Coverage Restaurants Need

While general liability is the most important type of insurance to have, there are several other forms of coverage you should be aware of. Below are some other types of insurance all restaurants should obtain:

Workers’ Compensation Insurance

Your state most likely requires that you carry workers’ compensation insurance if you have employees. The policy you get will provide financial help if one of your employees is injured performing job-related duties. It will pay for medical treatment as well as help cover lost wages if the employee has to take time off of work to recover.

Commercial Property Insurance

It takes a lot of capital to acquire the kitchen equipment, dining room furniture, and other supplies needed to start a restaurant. If you were to lose a significant portion of your property to an unexpected event like a fire, it would be costly to replace. With commercial property insurance, you can file a claim and get money for replacement property if it is damaged by a covered event.

Commercial Umbrella Insurance

An umbrella policy is designed to pick up where a general liability insurance policy leaves off. If you are in a situation where the limits of your general liability insurance are exceeded, like if you lose a major lawsuit, then your umbrella policy will pick up the slack. It will pay the remaining damages up until the limits of the umbrella policy are reached.

Should I Start an LLC FAQ

Choosing the right business structure depends on your business’s unique circumstances and needs. However, unless your business is very low risk (like a hobby), an LLC is likely the better option.

Visit our LLC vs. Sole Proprietorship guide to learn more.

At a minimum, you’ll need general liability insurance, workers’ compensation insurance, and commercial property insurance.

Read our Business Insurance article for more info.

You'll need quite a large investment to start a restaurant business. The range could be anywhere between $500,000 and $700,000. Rent, utilities, customized buildout for the kitchen, furniture, utensils, food, and prep materials make up the initial bulk costs. Others include Insurance, POS, menu printouts, advertising, etc.

Visit our How to Start a Restaurant guide to learn more about the costs of starting and maintaining this business.

The ongoing expenses of running a restaurant include utilities, salaries, insurance, permits and licenses, equipment maintenance, and food and beverage supplies.

Learn more about running a restaurant.

Restaurants make money by selling their prepared foods and beverages at a profitable margin.

Learn more about starting a restaurant.

The average profit margin for a restaurant business ranges between 2% and 6%. While economic conditions may affect demand, restaurants will always have a market.

Additionally, the restaurant industry is very competitive. To thrive in the market, restaurant businesses must keep up with new and emerging trends in the industry.

Learn more about starting a restaurant.