Getting a Limited Liability Corporation License (or LLC) is an essential step for opening your coffee shop. An LLC is a type of legal structure for a company.
An LLC License separates your business from your personal assets, offers you certain tax benefits, builds credibility with investors and customers, and helps you access business loans. We’ll also go over how to get and maintain an LLC License.
Separating Your Assets
An LLC has several advantages over other legal structures. The biggest one is that they separate your business assets from your personal assets. This can be a bit complicated to explain if you’re not well-versed in legal jargon (which is why you might want to invest in a lawyer when you start a business), I’ll explain.
Let’s say you get sued by an employee after an accident in the kitchen (kitchen accidents are common in the cafe industry). If you don’t have the protection of an LLC, that employee could come after your personal assets like your car or your house. An LLC separates your assets. Meaning that your employee wouldn’t be able to come after your house. Depending on the outcome, you might have to pay a lot of your business assets, but it’s still better than the alternative.
Of course, you should endeavor to avoid doing things that will get you sued in the first place. However, cafes are unpredictable businesses where a lot can go wrong. Burns, scalds, slipping and falling, and even computer hacking can put you at risk of a lawsuit. Having an LLC license is essential when dealing with a business that has such a large amount of variables.
Of course, not every business will succeed. Even the best business owner in America has a few failed business ventures. Luckily, LLC licenses come in handy in the unfortunate case of bankruptcy. If your business fails, your personal assets will be protected. It won’t be fun, but you’ll still have your house.
Tax Benefits
There are a lot of tax benefits to having an LLC. For starters, you won’t be double-taxed. An LLC’s profits or losses are taxed in a process called pass-through taxation. Without pass-through taxation, you’d be taxed for your business income and your personal income. With pass-through taxation, only your business is taxed. Since cafes, especially ones that are just starting up, run thin profit margins, saving this money can help you in the long run. Depending on your state, you can add several people to your LLC so they can receive the same benefit.
In addition to not being taxed twice, you can also get a Qualified Business Income Deduction. This deduction is aimed at small business owners. You can deduct up to 20% of your taxes. It is worth noting that this provision is scheduled to sunset in 2026.
If you decide to take an S Corp status with the IRS, you can save money on self-employment taxes. However, the owner would need to be paid a salary and you’d have to do a lot of bookkeeping and accounting work. It is up to you to decide if the tax savings is worth it.
Top 5 Reasons Why Your Coffee House Should Offer Free Wi-fi
Things LLCs Commonly Deduct
There are several things LLCs commonly deduct that can be helpful for cafes.
You can deduct health insurance premiums for yourself or your family. If you have employees, it is a good idea to have disability insurance in case one of your employees gets injured on the job (which is a hazard in food service work). This can be helped thanks to the deduction for disability insurance.
Giving to charity helps increase positive publicity, which small businesses need to connect to their communities. Many cafes routinely hold some type of charitable event, particularly around the holidays. Not only are these events good for publicity, but they are also tax deductible. LLCs can deduct up to 10% of their taxable income.
Many cafes offer free wi-fi. Not only does this attract people with disposable income, but Internet connectivity and technology are also tax deductible. Not only will you be attracting customers, but these things are also tax deductible for LLCs.
Building Credibility
If you’ve ever written or presented a business plan. You know that one of the things investors want to know is if you’ve set up a reliable legal structure for your business. Since America is a litigious society, investors want to know that you’re prepared to protect their investment. Forming an LLC shows investors that you’re taking the time to form your business wisely instead of rushing ahead blindly. By showing that you’re taking the time to form an LLC, you’re putting your best foot forward with potential investors.
Though LLCs are legal structures that don’t do anything for your average person standing in line at a cafe, having an LLC adds an air of legitimacy that some upscale customers like. An LLC can be helpful because they require the business to be unique. Your customers can therefore always trust that they’re getting a good product from you rather than someone trying to mimic your brand.
Another group you can build credibility with is people who give out small business grants. Many grants are available online, usually from government institutions (such as the Small Business Administration) or larger corporations trying to give back to local communities. Of course, these grants often come with strings attached. One of the strings is that the business must have a legal structure. Since LLCs are among the easiest legal structures to form, it’s a good idea to get one.
Pros and Cons on opening your coffee shop on holidays.
How to Form an LLC
There are a couple of ways to form an LLC. Some services will form an LLC for you for a price. You can also save yourself some money by forming an LLC yourself. You will have to go to your state’s website, get the documents you’ll need, and fill them out (online or by mail). The things you’ll need to send in include a unique name that is distinguishable from other businesses. Then, you’ll need to find an LLC Registered Agent that will help you form your LLC. Many services offer a year of free service which can help you while you get your cafe off the ground. It is possible to serve as your own registered agent but unless you know a lot about the legal system, this is probably a bad idea.
After that, you’ll need to submit your company’s Articles of Organization. Your Articles of Organization will include your company’s name, address, purpose, any co-owners of the business, your registered agent, your effective start date, and your duration of formation (which can be unlimited). Your purpose doesn’t need to be complicated. Something like “To run a cafe” will suffice. You can expand on your purpose at any point.
Then you will need an operating agreement for your LLC. Operating agreements are the list of responsibilities each member of the LLC has. Not only is this required for an LLC, but it’s also a good thing to have in general.
Since you will need employees to run your cafe, your LLC will need an Employer Identification Number. Luckily, these aren’t hard to get. Just go to the IRS website and you can get it there for free. With that, your LLC is formed.
Maintaining your LLC
LLCs are easy to form and easy to maintain as long as you follow a couple of basic rules. The first and most basic rule is to keep up with the paperwork. You have to renew your LLC license every couple of years or so. You don’t want it to lapse because you missed a simple paperwork deadline.
Secondly, you have to maintain your corporate veil. While an LLC provides your business and your personal assets with a lot of legal protection, these protections can be waived under certain circumstances.
If your business is severely under-capitalized, your creditors can argue that your business wasn’t eligible for LLC protection. As long as you manage your finances, you should be find. Secondly, you have to keep your business and personal finances separate. If your business and personal finances are co-mingled, you can lose LLC protection. In other words, don’t use your business bank account for personal transactions like your cable bill. You should get a business bank account so your business account is less likely to be co-mingled.
Finally, be careful how you sign things when signing business-related contracts. When signing contracts on behalf of your cafe, your signature should always include your title, the cafe’s name, and the fact that you’re signing as the leader of an LLC. If you use a personal signature for business contracts, that can cause problems down the road.
We Answer: Should Your Coffee Shop Also Serve Wine?
Frequently Asked Questions
It depends on the state but usually somewhere between $40 and $500.
Keep records of everything. These include minutes of formal meetings between you and your partners, your transactions, your profits, and anything else your registered agent says to keep a record of. It’s always good to have more documentation if you have to go to court.
To learn more on how to start your own coffee shop checkout my startup documents here
Please note: This blog post is for educational purposes only and does not constitute legal advice. Please consult a legal expert to address your specific needs.
Hi! I’m Shawn Chun
My adventure in coffee began when I first launched my first coffee shop back in the early 2000s. I had to figure out so many things on my own and to make it worse within 2 years of opening two large corporate coffee chains moved in just blocks away from me!
As I saw smaller and even some larger coffee shops in the neighborhood slowly lose customers to these giant coffee chains and slowly close up shop, I knew that I had to start getting creative…or go out of business.
I (like you may be) knew the coffee industry well. I could make the best latte art around and the foam on my caps was the fluffiest you have ever seen. I even had the best state-of-the-art 2 group digital Nuova Simonelli machine money could buy. But I knew that these things alone would not be enough to lure customers away from the name brand established coffee shops.
Eventually, through lots of trial and error as well as perseverance and creativity I did find a way to not only survive but also thrive in the coffee/espresso industry even while those corporate coffee chains stayed put. During those years I learned to adapt and always faced new challenges. It was not always easy, however, in the end, I was the sole survivor independent coffee shop within a 10-mile radius of my location. Just two corporate coffee chains and I were left after that year. All told the corporate coffee chains took down over 15 small independent coffee shops and kiosks and I was the last one standing and thriving.
Along the years I meet others with the same passion for coffee and I quickly learned that it is not only “how good a barista is” that makes a coffee shop successful, but the business side of coffee as well.
Hence why I started this website you are on now. To provide the tools and resources for up and coming coffee shop owners to gain that vital insight and knowledge on how to start a coffee shop successfully.
Stick around, browse through my helpful blog and resources and enjoy your stay! With lots of LATTE LOVE!
Shawn
