Starting a Restaurant Business
Thinking about starting a restaurant? Start here for an overview of important legal and financial considerations.
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Opening a restaurant has its own set of legal considerations. These include choosing the proper business entity, obtaining licenses and permits, dealing with health and safety, getting adequate insurance, reviewing franchising issues, and dealing with employees.
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 type business structure.
Licenses and Permits
You will need to obtain a variety of licenses and permits in order to operate your restaurant. In some cases, such as obtaining a permit for handling food, you most likely will need to look to a local government office. In other cases, such as obtaining a liquor license, you will probably need to work with a state agency such as a liquor control commission. And, if you are thinking of serving liquor in your restaurant, keep in mind that the liquor licensing process can be complicated and 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. Beyond needing to obtain a permit to handle and prepare food, you can expect regular monitoring from your local 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. Inspections may cover not only the food itself, raw and prepared, but also refrigeration systems, cooking equipment, and waste disposal, among other areas.
The health and safety of restaurant workers is also an issue. The Occupational Safety & Health Administration (OSHA) has a variety of regulations relating to, among other things, eye and face protection, hand protection, and walking-working surfaces.
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.
For more information, see Nolo's article on Obtaining Business Insurance.
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.
To learn more, see Nolo's article, Want to Buy a Franchise? Ten Reasons Not to Do It.
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.
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.