Each year, approximately 30,000 new restaurants are opened in the United States. Most restaurateurs understand the great risk that comes with these ventures; in fact, some sources estimate as many as 18,000 of the 30,000 restaurants opened this year will fail within the first three years in business. Despite the risk, many chefs and hospitality professionals dive right in.
If you’re a hopeful restaurateur, legal planning is an absolute necessity to ensure you don’t fall victim to many of the common mistakes that cause these businesses to fail. Consider the following:
Business Entity
All restaurant owners must carefully consider the best corporate structure for their businesses. Generally speaking, there are four types of structures:
- Sole Proprietorship – A sole proprietorship is a business owned and operated by a single person. You have complete control over your business, but your personal and business assets are not separate, which means you may be personally liable for your business’s debts and obligations.
- Partnership – A partnership is a business owned by two or more people. There are limited partnerships (LP) and limited liability partnerships (LLP). The main difference between the two is that in an LP, a single general partner has unlimited liability, and the other partners have limited liability, while in an LLP, all partners have limited liability.
- Limited Liability Company (LLC) – LLCs are a mix between partnerships and corporations. They can pass profits and losses through to your personal income and can protect you from liability. However, members of an LLC are self-employed, which has tax implications.
- Corporation – A corporation is a separate entity from its owners, thus offering the most liability protection to its owners. Corporations pay taxes on their profits and can be held legally liable in place of their owners.
In the case of a restaurant, most owners will want to limit liability, and protect personal assets, should there be a lawsuit filed by a customer or employee. An LLC or corporation is often recommended for restaurants since these limit personal liability.
A qualified business law attorney can help you identify which structure is best for your new restaurant, and help you prepare and file all required documents.
Zoning
As any successful restaurateur will tell you, a good location is key to a profitable restaurant. In considering the location of your restaurant, you will want to take into account the local zoning laws.
Some areas are restricted to residential dwellings, while others may be zoned for commercial use. Do you want to have outdoor seating in the summer? That, too, may be subject to zoning restrictions. Be sure to carefully outline how you plan to use the space and then identify possible locations accordingly.
Leasing a Space
If you don’t have the capital to buy a space for your restaurant, you’ll likely have to rent one. In many cases, costly renovations are required (especially if the space was not previously used for a restaurant).
When a significant amount of money is put into the space upfront, it’s absolutely essential that you take steps to protect your tenancy and ensure your business can afford to stay there for an undetermined amount of time. This might mean negotiating a favorable long-term lease and including specific clauses pertaining to rent increases.
A lawyer with experience in the restaurant industry should be consulted early in the process to ensure your best interests are protected.
Licenses and Permits
Unlike many other types of businesses, restaurants often require a number of licenses and permits from local governing bodies. Some permits you may need to get before opening your restaurant include:
- Business License – A business license is necessary to register your business with the state.
- Certificate of Occupancy – A certificate of occupancy details what your property is zoned for, that it’s safe to use, and that it’s up to date on inspections.
- Food Service License – A food service license, also called an employee health permit, ensures that your employees know how to handle food safely and help keep diners free from foodborne illnesses.
- Seller’s Permit – A seller’s permit allows you to charge sales tax on your goods.
- Liquor License – Any business that plans to sell alcohol must have a liquor license. If you’re purchasing an existing restaurant, the liquor license may be transferable.
- Food Facility Health Permit – All restaurants need a health permit to show they meet safe food preparation standards. Unlike some liquor licenses, health permits are not transferable when purchasing an existing restaurant.
In some cases, you may need additional licenses or permits. For example, if you plan to have patron dancing, you may be required to obtain a live entertainment license. You may need a sign permit to post any signage to attract customers.
An attorney can help you identify exactly what you will need and help you complete all applicable paperwork.
Patron & Employee Safety
To ensure the safety of all patrons, your local governing agency may require your restaurant to undergo regular inspections from the health department. To ensure the well-being of all employees, you should also review all Occupational Safety and Health Administration (OSHA) policies.
There are specific OSHA standards relating to young workers (under the age of 18) in restaurants. If your restaurant plans to employ minor workers, you should familiarize yourself with these standards.
OSHA also maintains a list of the most frequently cited restaurant standards. The list includes a description of each standard, the number of inspections, the number of citations, and the penalties. This data can serve as a reminder of the importance of these standards.
Insurance
If you frequent restaurants, you’ve likely witnessed an accident or two – a server spills a hot cup of coffee all over a patron or a bartender slips on some water from the ice machine. With the risk of injury high, it’s absolutely critical that all restaurant owners select an insurance policy that protects the business against lawsuits.
There are a few types of insurance that are vital for restaurant owners to get:
- General Liability Insurance protects your business when a customer or other guest on your property gets injured. For example, it would cover an injury caused by a customer slipping on a puddle.
- Property Insurance covers the property (building) itself, as well as the contents of the property. For example, if there is a fire in your kitchen, your property insurance may cover the cost of repairs and new appliances.
- Liquor Liability Insurance is for restaurants that also serve alcohol. It protects your business if an intoxicated customer commits a crime or causes harm or damage to someone else.
- Workers’ Compensation is a mandatory form of insurance that protects your workers. If an employee suffers an injury on the job, your worker’s compensation insurance is where their benefits come from.
- Business Interruption Insurance protects your business against losses associated with closures. For example, your business may be closed for renovations after a fire. During the COVID-19 pandemic, many restaurants had to rely on their business interruption insurance.
- Food Contamination Insurance covers the costs of lost food that has been contaminated or spoiled. For example, this insurance would cover if your freezer breaks and food goes bad.
- Automobile Liability Insurance may also be necessary if your restaurant makes deliveries. If you use a food delivery app for your deliveries, those services have their own insurance.
In selecting the best policy, speak with an insurance agent and knowledgeable attorney who have restaurant experience to ensure you are protected.
Intellectual Property
You have probably thought long and hard about your restaurant’s name, signature recipes, and even your tagline. Since these components are all critical to your branding and long-term success, you should take steps to protect them. An attorney can help you register the name of your restaurant or food creation as a trademark.
Franchises
If you are purchasing a franchise, you will have even more legal considerations, including the time-consuming review of the disclosure document and the often daunting franchise agreement.
California Business Law Attorneys
Opening a restaurant has its fair share of challenges, especially when compared with many other types of small businesses. By addressing potential legal pitfalls, restaurateurs can focus on the operational aspects of their business and enhance their chances of success. It’s absolutely essential that you consult an attorney with experience in the restaurant industry early on to reduce risk and expense down the road.
The attorneys at Schneiders & Associates are experienced restaurant attorneys, representing many food-service businesses in and around Ventura County. If you are planning to open a new restaurant, relocate a restaurant, purchase a franchise or purchase an existing restaurant, please contact us for assistance navigating the process and to avoid the pitfalls discussed above.