Starting a Restaurant Business in California

Important legal and financial things to know if you are considering starting a restaurant business in California.

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Starting a restaurant in California has its own set of legal considerations that are specific both to the restaurant industry and to the State of California. These include choosing the proper business entity, obtaining proper state and county licenses and permits, dealing with state and county health and safety regulations, getting adequate insurance, reviewing franchising issues, and dealing with employees.

To learn about other California business opportunities, see Nolo's section on Starting a Business in California.

Choosing the Business Entity

While you could operate your restaurant as a sole proprietorship or partnership, you should probably consider using a legal form that protects you from personal liability, such as a corporation or a limited liability company. Unlike some other types of business, such as certain professional or consulting offices, restaurants have a significant number of customers coming through every day, and in many cases also a significant number of employees engaged in a lot of physical activity. This increases the likelihood that a person could be injured, or his or her property damaged, on the premises—in which case you would want the business, not you personally, to be responsible for any liability.

Learn more about choosing a business structure.

Licenses and Permits

California law requires anyone who prepares, stores, or serves food in a restaurant to obtain a California Food Handler Card. The card is issued only after mandatory training and assessment. You can obtain the card from one of a list of state-certified organizations. Training and testing can be completed online. The card is valid for work in restaurants throughout California except for Riverside, San Bernardino, and San Diego counties, which have their own card programs. The cards for the latter three counties are valid only in the counties in which they were issued.

A frequently-asked-questions (FAQ) sheet with more information about the California food handler card is available online from the California Conference of Directors of Environmental Health (CCDEH).

If you intend to serve alcohol in your restaurant, you will also need to obtain a liquor license. In California, liquor licensing is handled by California Department of Alcoholic Beverage Control. Keep in mind that the liquor licensing process can be complicated and you may require outside legal assistance.

If your restaurant will be serving large numbers of people you may have crowd control issues and, therefore, need to obtain a license or permit from a fire or police department. Similarly, you probably will also need a permit or license from a local building department relating to adequacy of exits from the restaurant and related emergency issues.

Health and Safety

Because restaurants are all about people eating food, they are subject to significant regulations regarding food health and safety. An excerpt from the current California Retail Food Code prepared by the California Association of Environmental Health Administrators, which covers restaurants and other retail food businesses, runs over 150 pages. Just a few of the many matters the code covers are handwashing, timing and temperature for food storage and cooking, ventilation, liquid waste, employee storage areas, and floors and other surfaces.

With the food code in mind, you can expect regular monitoring from your county health department. Local health authorities generally have a lot of latitude regarding what they can inspect, and health department inspections can cover a wide array of items in your restaurant. As suggested by the state code, inspections may cover not only the food itself, raw and prepared, but also refrigeration systems, cooking equipment, waste disposal, and many other areas.

Each California county has its own rating system for inspections and the State of California had made some of this information available online.

Apart from state regulations regarding the health and safety of restaurant workers, the federal Occupational Safety & Health Administration (OSHA) also has a variety of regulations relating to, among other things, eye and face protection, hand protection, and walking-working surfaces. On the state level, the Labor Occupational Health Program (LOHP) at the University of California, Berkeley, using funds provided by State of California, has produced a short, readable restaurant safety training guide that can help you protect both your employees and your customers. The guide is available online through the LOHP website.

Insurance

There are particular risks associated with operating a restaurant, such as customers or employees slipping and falling on the premises, someone getting hurt from hot liquid or broken glass, or someone becoming seriously ill from the food itself. These are on top of more generic business risks such as fire, theft, or other sources of property damage or personal injury.

Try to work with an insurance agent who has previous experience writing policies for restaurants. For property coverage, try to make sure that everything of importance, from plates to stoves, is fully covered. For injuries to people, make sure you have an excellent general liability policy. This should cover not only a patron who slips at your restaurant’s front door, but also one who becomes gravely ill from eating the restaurant’s food. And, if you do outside catering, make sure you have proper vehicle insurance, as well.

Franchising

If you’re thinking of opening a restaurant that is part of a franchise, keep in mind that you will have to operate under far more restrictions than if you opened your own independent restaurant. You will be subject to a franchise contract which you should expect to favor the franchisor, and which likely will give the franchisor rights to:

  • decide where other competing restaurants will be located
  • block sale of your franchise to a particular prospective buyer
  • choose the geographic location where any disputes will be resolved, and
  • require you to buy all of your goods and services from the franchisor.

Along with the restrictions contained in the franchise contract, you should keep in mind the additional financial costs of a franchise. In exchange for being given a preexisting business plan, getting certain help as needed when running the restaurant, and benefitting from group marketing, you will be required to pay out a substantial amount of your profit to the franchisor. More specifically, apart from a large initial franchise fee, expect to be required to pay the franchisor:

  • a percentage of your profits as a royalty
  • an above-market cost for equipment, goods, and supplies purchased from the franchisor
  • finance charges on those same purchases
  • training fees for you and your employees, and
  • contributions to a fund for group advertising.

If you are considering starting a restaurant as part of a franchise, investigate the franchise as thoroughly as you can, including reviewing closely the federally-required franchise disclosure statement.

Employees

Most restaurants have employees and, in many cases, there can be relatively frequent turnover, particularly among waitstaff, bussers, and similar positions. You should inform yourself about basic employment law issues such as illegal discrimination, workers compensation, and how to handle the hiring process. With regard to hiring in particular, learn how to:

  • create a useful job application that does not include illegal questions
  • check references or make other preemployment inquiries -- again without violating privacy laws or otherwise seeking illegal information, and
  • ask interview questions that are both useful and legally permissible.

Keep in mind that there are some employment laws that are specifically relevant to restaurants, such as minimum wages for tipped employees, as well as rules regarding various training and exams related to food handling and preparation. Many of the training and testing rules are addressed in Chapter 3 of the California Retail Food Code, which covers Management and Personnel.

A good resource for general employment issues is The Employer’s Legal Handbook, by Fred Steingold (Nolo). Also, many key employment laws are administered through the Department of Labor, and there are a variety of informative webpages within the Department of Labor website.

by: , Contributing Author

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