If you’re thinking about opening a restaurant, it’s important to make sure you understand how restaurants work and what type of business they really are.
Restaurants sit in a unique position of providing both a product and a service
The customer is always right – you want your restaurant to provide a welcoming environment that people want to come back to
Quality wins – you also need to provide good products that people are willing to pay for
What Business Category is a Restaurant?
In general, restaurants are seen as members of the food and drink category of the hospitality industry. The hospitality industry falls under the wider umbrella of the service industry.
This makes sense because restaurants provide a service to customers. They offer a comfortable place to relax, eat, and socialize while someone else handles the preparation and plating of their food. Any establishment that prepares and offers food for people outside of their homes is considered part of the food service industry. You might want to check out current fast food industry statistics.
Is A Restaurant A Service Business?
Restaurants combine aspects of businesses selling products and service businesses.
Typically, when a customer arrives at a restaurant, they receive a service from the waitstaff and host in the form of a welcome and being shown to a comfortable seating area with a pleasant atmosphere. They then view the menu and choose the product they’d like to buy in the form of what meal they order.
Once they place the order, they receive the service of having someone else prepare, plate, and deliver their food, as well as cleaning up after them.
In this way, restaurants sell both the product of food and the service provided by their waitstaff and cooks.
How to Choose the Right Business Structure
When considering how to open a restaurant, you should explore the various business structures. There are many different ways to structure a business, each with pros and cons.
A sole proprietorship
Sole proprietorships are the easiest business structure to form. You don’t have to do anything at all to form the company. As long as you have the right restaurant licenses and permits to sell food, you’re ready to start.
The drawback of a sole proprietorship is that they don’t provide any form of personal liability protection. Your assets are your business’s assets, meaning they’re at risk if your company fails.
A partnership, like a sole proprietorship, is relatively easy to form. You do need to file some paperwork, but it’s usually easier than other types of business structures.
With a partnership, you and one or more other people can work together and share ownership in the company. Depending on the type of partnership you form, you may receive some personal liability protection or none at all.
For example, a limited partnership offers liability protections while a general partnership generally assumes that each owner splits ownership, revenues, and liability evenly.
A Limited Liability Company (LLC)
A Limited Liability Company (LLC), as its name implies, offers liability protection to its owner. These businesses are more difficult to form, involving more paperwork and having stricter filing requirements for business documents. They also may cost more to form and keep open. You also need to keep your personal and business funds separate.
The additional cost and effort make an LLC better for a larger business or one that’s becoming more established. However, the benefit is that if your business goes under or someone sues your company, your personal assets can be protected.
An S Corporation is a business structure that lets its owners pass the company’s income, losses, deductions, and credits through to its shareholders for tax reporting purposes.
Only certain businesses are eligible. For example, companies with international operations or more than 100 shareholders can’t file as an S Corporation.
S Corporations can have tax advantages for their owners' thanks to their unique tax treatment. For example, business owners can take profits from the company as shareholder distributions rather than wages, avoiding certain payroll taxes.
A C Corporation is much like the opposite of an S Corporation. Instead of passing income, expenses, and so on to the company’s owners, C Corporations are taxed as separate entities.
C Corporations are the most common type of corporation in the United States. They offer personal liability protection like LLCs and S Corporations. One advantage is that they have low corporate tax rates, allowing business owners to reinvest profits in the company more effectively. There are also fewer limits on them with regards to things like the number of shareholders.
Frequently Asked Questions (FAQs)
Knowing what type of business a restaurant is considered can be tricky. Here are some other essential things to know.