What could be more fun than launching your own donut shop? From choosing your flavors to decorating your dining area, the whole process can be fun and festive. But of course, there are also some administrative tasks to take care of, including the less-glamorous work of choosing your shop’s legal structure.
Note: When you start making dough with your donut business, you’ll automatically be classified as a Sole Proprietor. In order to grow your business and ensure long-term viability, however, sooner or later you’ll want to opt into LLC status.
But what is an LLC? How do you start one? And why is this legal structure so advantageous for donut entrepreneurs? Don’t worry: We’ll cover all of those topics and more, providing comprehensive insight into establishing your own pastry LLC.
What is an LLC?
First things first: When we talk about an LLC, exactly what are we talking about?
LLC is short for Limited Liability Company. It’s one of the most popular legal structures for small businesses in the United States.
Here’s what’s most important about the LLC compared with the Sole Proprietorship. With a Sole Proprietorship, there is no legal distinction between the business and the owner. All of your business assets count as personal assets, and vice versa. Same goes for your business liabilities. The upshot? If someone brings a lawsuit against your business, the Sole Proprietorship doesn’t offer any kind of shield or protection.
With the LLC, however, a separate business entity is created. You can keep your personal assets and liabilities safe and distinct from your business assets and liabilities. So, whether your donut shop is faced with a slip-and-call flaim, an intellectual property lawsuit, or simply a cantankerous creditor, the LLC helps shield your personal wealth.
And that’s just one of the dimensions that makes the LLC so well-suited for small businesses, particularly donut and pastry shops. Now let’s look at a few more.
Why LLCs are the Perfect Fit for Donut Shops
Consider just a few of the advantages to establishing your donut shop as an LLC:
- You have tax flexibility. Starting out, you’ll likely want to pay your taxes on a pass-through basis, simply claiming profits on your personal tax return and paying your standard tax rate. An LLC will let you do that. If the business booms and you suddenly find yourself a multi-national donut tycoon, you can opt for corporate tax status. An LLC gives you that option, as well.
- You have managerial flexibility. Do you want to be the head donut-maker? To split managerial duties with a partner? To bring on multiple partners? To outsource everything to a professional management team? No matter how you decide to handle the operational elements of your business, an LLC will accommodate.
- You have minimal administrative responsibilities. Yes, there are a few hoops you’ll need to jump through to establish your LLC. More on those in just a moment. But compared with other types of business structures, including the Corporation, starting an LLC is pretty simple. You don’t have to issue shares, have stakeholder meetings, or provide detailed annual reports. Mostly, you’ll be able to focus on making donuts!
- You have legitimacy. Compared with Sole Proprietorships, LLCs convey a real sense of professionalism and authority. You’ll get to have a business bank account, accept checks made out to the business, and more. Yours will seem like a “real” business, not just a side hustle or a hobby, and that can come in handy when seeking investors or recruiting new employees.
These are just a few of the reasons why the LLC structure is an ideal choice for the typical donut shop. Now the question is: How do you get your LLC off the ground?
How to Start Your Donut Shop LLC
The requirements for starting an LLC can vary a little bit from state to state, so it’s important to investigate the specific stipulations in your area. For example, the requirements to start an LLC in Texas may be a bit different than the ones for launching an LLC in California.
With that said, here are a few of the most important things for donut entrepreneurs to know as they seek to establish their business legally.
1) Choose the state where you’ll register your LLC.
This might seem like an odd place to begin, so allow us to explain: Different states have different LLC fees, different tax rates, and different reporting requirements. As such, some entrepreneurs think they should shop around to decide which state is best for registering their LLC.
This might make sense for some businesses, but it doesn’t really work for donut shops. If you’re running brick-and-mortar stores, you’ll want to register the LLC in whichever state(s) you’re operating in, plain and simple.
2) Choose a name for your business.
Choosing a sweet, confectionary moniker for your donut shop can be a ton of fun. As you lose yourself in pastry puns, however, remember one basic legal requirement: Your LLC cannot use a name that’s already in use by another LLC in the state. Most states have online directories, allowing you to easily ascertain whether the name you’re after is truly available to you.
3) Select a Registered Agent.
LLCs are required to have a Registered Agent. This can be a person or an organization who is legally appointed to receive tax, business, and legal documents on your behalf.
While most states allow you to serve as your own Registered Agent, it’s usually smarter to hire a third-party vendor. The reasons for this are:
- It allows you to avoid any problems if you’re not physically present at your shop for a few days or a few weeks at a time.
- It ensures that you have somebody else who can receive and organize legal correspondence, freeing you to focus on donut making.
- In most states, Registered Agent services are quite affordable, often costing between $50 and $300 annually.
Make sure you have a Registered Agent with a physical mailing address in your state of registry. A P.O. Box won’t count!
4) File your Articles of Organization.
Next comes some paperwork! Different states will have different requirements for your Articles of Organization, but typically the requirements look like this:
- Name of your business
- The names of any members (i.e., you and anyone else who’s coming on board as your pastry partner)
- A quick summary of your business’ purpose/goal
- The name and contact information for your Registered Agent
You’ll also need to pay a small LLC registration fee, which can vary by state. Often, it’s as low as $20 or so.
5) Draft an Operating Agreement.
This part isn’t legally necessary, but it can still be a really wise idea.
Think of your Operating Agreement as a kind of rulebook, or constitution, for your donut shop. It’s where you can outline your thinking about how the business should be run. For example, your Operating Agreement might denote:
- How you and your partners allocate managerial duties and profit shares.
- How you’ll bring on new partners, or deal with the departure of a partner.
- What process you’ll use to vote on significant changes, like opting for corporate tax status.
Bottom line: Having an Operating Agreement in place can help you avoid significant disputes or legal conflicts down the road.
6) Get your banking right.
There are a couple of steps you’ll need to take with regard to your banking.
First, claim an employer identification number, or EIN. You can get one for free from the IRS. You won’t necessarily need this on Day One, but you will need it to file taxes or to administer payroll.
Second, set up a business bank account. It’s imperative that you have an account that allows you to keep your business funds separate from your personal funds.
7) Get the right business licenses.
Business licenses can vary by state, but depending on where you are, you may need:
- A license to open your business.
- A permit to handle and serve food.
- A permit to have a large outside dumpster.
- A permit to hang signage.
- A permit to operate a food truck.
Check with your local Chamber of Commerce for more information.
8) Keep up with reporting requirements.
Finally, remember that most states mandate that LLCs file reports each year, simply reaffirming your business name and contact information. You’ll also need to vouch for your Registered Agent. If your Registered Agent changes their address, or if you change your Registered Agent, you’ll need to report that to your state ASAP.
Bring in the Dough with Your LLC
There are several things you can do to position your donut shop for success. Perfect your recipes. Refine your menu. Ensure the best ingredients. Scout out an ideal location. And, of course, choose the right legal structure. For more donut shops, the LLC is the way to go.
Amanda E. Clark is a contributing writer to LLC University. She has appeared as a subject matter expert on panels about content marketing and small business ownership.