Your Business Structure
Whether you start as a personal chef or a caterer, you'll have to decide on a formal business structure. You can operate as a sole proprietorship and file an extra schedule, or form, with your personal income tax, or you may choose to form a corporation and file a separate tax return for the business. This may seem like a dull task that can wait, but without formalizing a company structure, you can't open a bank account for the business or get additional investors.
While setting up a corporation is more expensive initially than operating as a sole proprietorship, there are benefits to operating within a corporate entity. Corporations provide protection if someone should try to sue you, or if the business goes bankrupt. Corporations also offer certain tax advantages.
Make sure your attorney is well versed in small business matters and has other small business clients. If you're the smallest client your lawyer has, chances are your needs will always be at the bottom of the pile. Check with your state's bar association to verify that your attorney has a clean, unblemished record.
There are three types of corporations, each with its benefits and limitations — the limited liability company (LLC), the S corporation, and the C corporation. Discuss the types that are available in your state with your attorney and work with her to decide which type will be best for your business goals. Some types of incorporation allow more investors than others.
Running your new catering or personal chef business as a sole proprietorship means that you are the sole owner, and that you may file your business's tax return on your federal and state returns on a Schedule C.
While this makes paperwork and tax filing easier, there are downsides to operating under a sole proprietorship. Under this type of structure you can't have any partners. Also, since you're not incorporated, you are personally liable for any lawsuits that may be filed against you. Say, for example, that a client claims you're responsible for the food poisoning that sickened all of his guests. He could sue you directly and go after your personal assets.
When you create a name for your business, you will be required to register it. Often, the only step you need to take is filing a Doing Business As (DBA) certificate with your state. Check with your attorney about local rules and regulations in your area.
Also, if the business goes bankrupt, you will be held personally liable for any payments due to creditors. This means that if there are outstanding loan payments or unpaid vendor bills, you, as the sole business owner, are personally responsible for any monies owed, and your personal assets may be used to pay off debt. Any gains or losses from the business get funneled into your adjusted gross income.
Limited Liability Company
A limited liability company (LLC) takes advantage of the liability protection of a corporation and the tax benefits of sole ownership. The LLC structure offers more flexibility in the management of your business than the C corporation or S corporation options. Many restaurants and catering businesses choose this structure. Check with your financial and legal advisors to confirm that this is the way to go.
Even if you are able to get some insurance coverage added onto your household policy or are eligible for additional liability coverage on a business insurance policy as a caterer, you still are more vulnerable than if you incorporate and run your business as a corporation.
With this type of structure, you incorporate under state law; becoming an S corporation on a federal level is optional. If the company does incorporate at the federal level, there are additional tax benefits. S corporations operate under a limited number of investors. Setting up this kind of corporate shell is somewhat complex, so you will need some expert advice.
A C corporation is a legal entity that exists separately from the business owners. While corporations, of course, can be sued, the corporate shell provides the owners legal protection. In most cases, personal assets cannot be confiscated. In C corporations, all gains and losses are absorbed by the corporation. While the C corporation will cost anywhere from $500 to several thousand dollars to set up, depending on the lawyer you use, it is worth the investment if you plan to be in business for at least a few years.