Understanding Business Structures for Your Restaurant
Once you create a business plan for your restaurant, you must choose a suitable business formation. Your business structure will affect your legal and financial responsibilities, including how you operate your company and pay taxes.
The restaurant business structures Canada supports include a sole proprietorship, partnership, corporation (S and C corporations), and cooperative.
Some of these four primary types of business structures include sub-categories, mainly differing in taxation and liability.
Let’s see what each ownership structure includes to help you pick a suitable one for your Canadian restaurant business.
Sole Proprietorship
A sole proprietorship is a business with one owner. The sole owner has complete control over business operations. They decide how to pursue success, don’t share revenue with anyone, and own all their assets.
You can quickly form a restaurant as a sole proprietor, enjoying straightforward and cost-effective registration. You don’t need to register a business name because your legal name serves that purpose.
Because of that, sole proprietors must pay personal income tax on all generated profits. Your restaurant won’t be taxable as a separate entity.
That brings us to this business structure’s drawback: you’re personally liable for losses and debts because a sole proprietorship isn’t a separate legal entity. It’s an unincorporated organization where the owner has unlimited liability.
Partnership
A partnership is similar to a sole proprietorship but involves a partnership agreement between two or more people. It’s an excellent choice if you wish to partner with a family member or close friend.
Since this ownership structure involves partners as owners, it includes profit sharing according to the partnership agreement’s terms. The same goes for responsibilities and expenses.
Like sole proprietorships, partnerships don’t have a legal structure but must register a business name unless they operate in Newfoundland and Labrador.
When opening a partnership restaurant in Canada, you can choose from a general, limited, and limited liability partnership (LLP).
General Partnership
A general partnership (GP) is an organization where each partner is personally liable for losses and debts. However, they’re also subject to collective liability. This unlimited personal liability can be a significant disadvantage.
Limited Partnership
A limited partnership (LP) has at least one general partner. Other partners in the organization are limited partners.
These silent partners can’t actively participate in running the restaurant. They receive passive income, meaning they don’t have to report it via personal income tax returns. However, they have limited personal liability, meaning they’re not responsible for losses and debts.
Limited Liability Partnership
An LLP is a formal structure with no general partners. Some or all of them can be liable for business debts and other obligations.
It’s vital to note that you can’t open a limited liability company (LLC) in Canada. However, an LLP offers the same liability protection. The only difference lies in the semantics; an LLC has members as owners.
Corporation
Unlike sole proprietorships and partnerships, every corporation is a separate legal entity. It has a shareholder ownership structure where owners receive salaries like all employees.
Shareholders and directors control operations but have limited liability, meaning this legal structure protects personal assets from potential debts and losses. The corporation handles them.
Corporations provide dividends to shareholders, who file personal income taxes separately. When running a restaurant corporation, you’ll pay corporate taxes and own all assets.
It’s crucial to know you can incorporate federally or provincially. Federal incorporation is necessary when the business intends to run nationwide (e.g., opening chain restaurants in multiple locations across Canada). Its provincial counterpart lets you run restaurants in one province.
Corporations have two structures: C and S corporations. Both protect personal assets (shareholders’ and owners’) from creditors. However, C corporations can have unlimited shareholders, while S corporations can’t have more than 100. That means they can’t go public.
Additionally, S corps can’t have more than one stock class. Their shares can have voting and non-voting rights, but the ownership stake must be equal.
Let’s see what these structures entail.
C Corporation
A C corporation is a legal structure subject to double taxation. Here’s what that means.
C corporations file income taxes at the corporate level before using their after-tax income to provide dividends to shareholders. The latter then report personal income tax returns on those dividends.
However, C corps can avoid double taxation by replacing dividends with salaries or meeting the IRC’s (Internal Revenue Code) S-corp election requirements during incorporation. That way, the IRC will treat the company as an S corp. Here’s what that means.
S Corporation
Unlike C corporations, S corporations don’t have to pay taxes twice. Instead, they file federal income taxes at the shareholder level only.
As such, an S corporation is a pass-through legal entity passing its profits, losses, credits, and deductions to shareholders for personal income taxation. That’s the same tax-paying structure partnerships have.
Cooperative
A cooperative isn’t a legal entity but an association of individuals with mutual goals who promote social, economic, or cultural benefits. All members actively participate in business decisions and operations, voting democratically and sharing profits.
This cooperative structure makes co-op revenue and success vary depending on member (patron) participation. However, co-ops often enjoy government grants and discounts on materials and supplies. They also don’t need to pay taxes on surplus earnings (which members receive according to their patronage), although they pay federal and provincial income taxes.
Like corporations, co-ops can have a provincially or federally incorporated structure. You can choose from the following:
- For-profit (FP) cooperative – Businesses must incorporate under the Business Corporations Act to run operations as this co-op type and file corporate income taxes.
- Not-for-profit (NFP) cooperative – The Corporations Act requires businesses setting this co-op to incorporate as a corporation. Such a company can get government funding and is exempt from paying income tax.
The core differences between these cooperatives lie in the incorporation paperwork and their primary purpose (money isn’t NFP co-ops’ main goal).
What Ownership Structure Is the Best for Restaurants?
Your chosen business structure depends on your restaurant’s size and ownership preferences.
For example, a sole proprietorship is best for small restaurants and family-owned businesses. You can set it up quickly, make decisions individually, and retain all earnings. However, all responsibilities fall on you, making running your restaurant stressful and affecting your work-life balance.
A partnership (general or limited) is an excellent choice if you wish to own the restaurant jointly and share the responsibilities. However, that means sharing the earnings and maybe encountering disagreements regarding critical decisions. Still, two (or more) heads are better than one, and you can acquire the necessary starting capital quickly.
Setting up an LLP takes more time and money, but this partnership suits restaurant chains and multiple franchises more than individual restaurants.
The same goes for forming a C or S corporation. It’s not the go-to option when opening a new restaurant. It’s better for restaurant chains and is significantly more expensive and time-consuming to set up.
Therefore, start small and change the business structure once there’s room for expansion (unless you prefer running a local restaurant). You can always submit the necessary paperwork to incorporate your business provincially or federally.
As for cooperatives, only some restaurateurs choose this structure because most typically want to retain all earnings and have the final say regarding critical decisions. However, the worker-owned co-op model ensures better working conditions, higher job satisfaction, and lower employee turnover. It can be perfect for small restaurants.
Besides government programs, grants, discounts, and non-taxable surplus earnings, a restaurant co-op is beneficial because everyone wants to contribute. Their success depends on it, providing the necessary motivation.
Which Business Structure Will You Choose?
Once you mull over the information above to determine your new restaurant’s best business formation model, seek legal counsel for professional guidance. An experienced lawyer or accountant will help you make an informed decision, save time and money, and guide you through the employment law in Canada.
FAQ
What Business Structures Are Available for Canadian Restaurants?
Canadian restaurants can be structured as sole proprietorships, partnerships, corporations (including S and C corporations), or cooperatives, each with unique legal and financial implications.
How Does Choosing a Business Structure Affect My Restaurant?
Your choice of business structure impacts legal responsibilities, financial obligations, tax payments, and how you operate your restaurant.
What Are the Key Differences Between Sole Proprietorships and Partnerships?
Sole proprietorships are owned and operated by one individual, bearing full liability, while partnerships involve shared ownership, profits, and liabilities among two or more individuals.
What Is the Benefit of Incorporating My Restaurant?
Incorporating offers limited liability protection, separating personal assets from the business’s debts and obligations, and may influence tax treatment.
How Can a Cooperative Structure Benefit My Restaurant?
A cooperative involves mutual ownership by members who share in the decision-making and profits and potentially enjoy certain tax advantages and government grants.
Resources
https://www.webstaurantstore.com/article/79/restaurant-legal-structure.html
https://www.mycompanyworks.com/how-to-choose-a-business-structure-for-your-restaurant/
