Opening a New Restaurant? We’ve Got Some Info For You
So you have decided to go boldly where many others have gone before: You are opening a new bar or restaurant. Now that you have the concept and the staff structure in mind, what financial and legal expertise do you need to succeed? David Schoenherr, an Associate at Stahl Cowen, and Rob Swenson, a Director at ORBA, recently collaborated on this topic to highlight some of the important issues to understand.
From a legal perspective, David recommends that you to discuss the following five points with an attorney before you begin your new adventure:
- Entity Formation – Assets and operations of the restaurant business should be housed within a formal limited liability entity (whether as a limited liability company or corporation, for instance) rather than through a proprietorship or general partnership. Articles of organization or incorporation should spell out the owners and the structure of the entity. Liability protection is important and can be accomplished with the proper entity.
- Ownership – Determine the parties that you would like to share in the equity and income of the business. A limited liability company provides an effective vehicle for parties to create ownership interests that are differentiated as to who shares in income, who shares in equity and who has the right to manage the entity.
- Capital – Owners should educate themselves as to the possible means of financing their bar/ restaurant business. Businesses can be financed by any combination of owner-contributed capital, commercial loans, and/or other private debt and equity raises. Owners should seek assistance from appropriate professionals to ensure that all obligations are properly documented and that asset and risk exposure is understood and mitigated.
- Intellectual Property – Steps should be taken to protect any and all intellectual property of the business, such as trademarks or trade names, or any other proprietary materials (business plans, procedures, trade secrets, etc.). If intellectual property is important to your bar or restaurant business, make sure you seek appropriate trademark, copyright and patent protection, as well as confidentiality and non-disclosure agreements from managers or venders where appropriate.
- Dispute Resolution and Transfers of Ownership – Owners often focus on the organizational and operation phases of their business and neglect to plan for dispute resolution, or the mechanisms by which partners can enter and leave the business in the future. These matters should be planned for at the onset of the organization of your business and provisions dealing with these matters can be incorporated into properly crafted organizational documents and agreements.
Turning the page to the tax side of the equation, Rob recommends you discuss the following five items with your CPA:
- Cost Segregation Study – Consider this when opening a new location; it can accelerate the tax benefits of your construction costs. Buildings and equipment are depreciated for a period of between 5 and 39 years. The object of cost segregation is to classify as much as possible to the 5-year assets in order to accelerate that depreciation deduction.(Note: Thanks to some recent taxpayer friendly law changes, restaurant buildings enjoy a 15-year depreciation life. However, that is scheduled to revert for buildings placed in service in 2014 and thereafter to the previous rule of a 39-year life.)
- Work Opportunity Tax Credit – This federal income tax credit offers an incentive to hire individuals from specific groups considered to be disadvantaged. To claim the credit, the employer must apply to the state employment agency for certification that the employee qualifies. More information can be found here.
- Illinois Small Business Hiring Credit – Small employers in Illinois can qualify for a $2,500 tax credit for creating new full-time positions. When starting a new bar or restaurant in Illinois, all of your new full-time hires should qualify for the credit. Check the ORBA website for more information.
- FICA Tip Credit – If your new establishment employs tipped workers, you are eligible to claim a federal income tax credit for the FICA (Social Security and Medicare) taxes you pay on your employees’ tips. This can be a significant income tax benefit for the business owners.
- Basis Issues – In order to deduct losses from your business, you will need to have tax basis in the entity. Depending on your choice of entity above, there are different ways to achieve this.
If you have additional questions or would like to discuss your new restaurant venture, contact David at firstname.lastname@example.org or Rob at email@example.com.