Whether you’re a new owner or considering a second location, expanding within the foodservice industry is an exciting decision, but it also comes with several items to navigate. Below are a few first steps any restaurant owner should think about before opening their doors for the first time.
Find Trusted Advisors
One of the most crucial steps to starting any business is to make sure you surround yourself with the best advisors that suit your needs. Having a trusted attorney and accountant will benefit your business for years to come. Attorneys can help you with the legal documents needed to get your new restaurant up and going and your accountant will be able to advise you in making key financial decisions and selecting the most appropriate entity type for your new restaurant. As your business grows, the complexity of both the accounting and potential legal issues will too, so it’s important that your advisors will be able to grow with your business.
Decide on Entity Choice
There are several types of entities out there, which one is best for you? We highly recommend discussing this question with your advisors. They are the ones who know your personal and business goals the best and can help you make the most appropriate decision. Each different type of business (Sole Proprietorship, S corp., C corp., LLC or Partnership) has its own unique tax and legal boundaries and applications. Depending on your unique set of needs, the most appropriate entity for you will be different from the next restaurant. Additionally, DBAs (doing business as) are rather common in the foodservice industry, due to restaurants filing registration documents before finalizing a name for their actual brick and mortar restaurant.
Consider Financing Options
There are three major types of financing for a new business. It’s important for an owner to weigh all these options carefully and decide what best meets both their short and long-term goals and expectations.
- Equity Financing: Selling partial ownership of your company for cash or other assets is known as equity financing. There will be no required payments to a lender by generating funds through the sale of equity and can be a great way to preserve cash upon the initial startup.
- Borrowing From a Certified Lender: A more commonly known practice of generating cash is to borrow it from a lender, such as a loan from a bank. The principal of the note must be paid back with interest on a fixed schedule.
- Personal Funding: There is a significantly more beneficial way of financing a business that does not require the sale of ownership or interest and principal payments. If the owner can personally sustain the cashflow needs of the business, they may do so without the sale of ownership or the borrowing of funds.
You may use any combination of the above three financing options. Your accountant can assist in the structuring of financing combinations in a way that would be most beneficial to your circumstances.
Establish Financial Reporting
For many first-time business owners, keeping the financial books for their business can take some time to get used to. There are two main bases of financial reporting: the cash method and the accrual method. The cash basis of reporting recognizes income when payment is received and expenses when payment is made. The accrual basis of accounting emphasizes matching income to when it was earned rather than when it was paid and expenses as they are incurred rather than when they are paid.
Each basis of financial accounting has its own rules and journal entries that must be followed to accurately present the business’ annual financials. For more information on financial reporting, your CPA can help you with specific items that require recognition.
For most restaurants, the business will not have accounts receivable. This means they will be receiving payment for their services at the time the services are provided. The restaurant may have some payables, or paying a vendor after the goods or services are provided. For most restaurants, it’s common and beneficial to use the accrual method. Income items will easily be tracked as they are received when the services are rendered, while expenses can be recognized over the period in which they are used.
Understand Depreciation of New Expenses
In general, the expenses associated with starting a new restaurant can be expensed partially in the year in which operations begin and partially amortized over a 15-year period. Section 1250 of the Internal Revenue Code allows new businesses to deduct up to $5,000 of qualified startup costs in the year in which the business begins its operations. Any amount over $5,000 will be deducted evenly over 180 months. Your accountant can assist you in compiling your deductible and amortizable startup costs.
The equipment used in the kitchen of a restaurant, such as the range, grill, walk-in cooler or point of sale system can be a rather large expense and although you may elect the cash basis of accounting, you may still depreciate a portion of these expenses over the life the equipment for tax purposes. Depreciating assets allows you to spread your deductions from business expenses across the life of these assets, rather than expensing all the costs in the year in which they were purchased. Additionally, there are accelerated depreciation methods that are accepted by the IRS for certain properties. Ask your tax advisor about these methods to make sure you are minimizing your tax liability every year.
Take Advantage of the ERTC
The foodservice industry is one of the more impacted industries by the pandemic. It’s comforting to owners to know that there is some tax relief for those who retained their employees throughout. A qualifying business that continued to pay eligible wages throughout the pandemic is eligible for the Employee Retention Tax Credit (ERTC). Businesses that began carrying on operations after February 15, 2020, that have average annual gross receipts under $1,000,000 will remain eligible for the ERTC in the 4th Quarter of 2021. Read more regarding the ERTC and qualifying startup businesses.
Our team of CPAs and advisors helps businesses in the lodging, food and beverage industries add value through tax strategies and financial advice. Learn more about how we can help you by contacting an Anders advisor below.All Insights