I often say that opening a restaurant is like becoming a parent. It keeps you up late at night, it occupies most of your time and attention, it makes you worry whenever you leave it with someone else…. But like parenthood, restaurant ownership can also get easier over time. And, when it does, you may actually start thinking, “hey, I’m beginning to get the hang of this.” If you are lucky enough for that to happen to you, you may also think like the parents of a moderately behaved toddler – “maybe it’s time to think about number 2.”
That decision (as related to restaurants, at least for these purposes) is fraught with many more issues than I could ever cover in one blog post. So I will allow this post to cover only one such issue – whether you need to create a new entity for the new location. My answer, in almost all instances, is a resounding “Yes.”
The main reason is this: you will need to sign a new lease for your new location. And, with that new lease, comes another set of significant obligations and financial liabilities. If you don’t create a new entity, not only will your new restaurant be responsible for those liabilities, so will your first one. That is to say, if the new restaurant flops and goes out of business, but the first one is continuing to do well, failure to form a new entity can allow the Landlord for location Number 2 can go after the bank accounts and assets of location number 1. In short, Number 2’s debts can bring down Number 1 along with it.
If you create a new entity, however – call it McSwiggen’s Ale House Number 2, LLC – only the assets of that entity will be available to satisfy any liability under that Lease. The assets of McSwiggen’s Number 1 LLC will be protected by laws of limited liability (that’s what the two L’s in LLC stand for, after all). Yes, of course, you personally may be on the hook for any personal guaranty on Number 2’s lease, but the first restaurant – the one that was doing so well that it caused you to think about Number 2 in the first place – will still have the chance to live to fight another day.
To use a different analogy from the one I started with, you can build your restaurant business like an apartment building or a suburban subdivision. And if you think of your restaurants like that, think of financial difficulty like a fire. If you use the same LLC entity for each new location, financial difficulty in one will threaten to bring down them all, just like a fire in that apartment building. But LLC laws allow you to treat your restaurants like suburban homes on a cul de sac. They may all look the same, and be constructed the same, but they all stand on their own. And, while a fire in one will not be welcome to the neighbors, they’ll all still have some place to sleep that night.
Getting good advice and doing things right the first time will help you sleep at night too. Before you open your second location, consult with an experienced restaurant lawyer to make sure you do all you can to protect the first.