How to Start a Hookah Lounge

Your hookah lounge business can go up in smoke if you don’t follow federal, state, and municipal laws.

By , Journalist

A hookah lounge is a gathering place, much like a bar or social club, where people go to mingle and socialize around the activity of smoking hookahs. Hookahs are pipes made of glass or metal and have long hoses and a bowl at the top. The bowl is filled with shisha, a tobacco mixture flavored with fruit, syrup, herbs, spices, molasses, or other ingredients, and topped with charcoal. Groups of two, four, or six sit around a table with the hookah placed in the center, and each draws the shisha from their own designated hose. The device is centuries' old, appearing first in India and soon used by much of the Middle Eastern world.

Understanding Applicable Laws for Hookah Lounges

Because most hookah mixtures contain tobacco, hookah lounges fall under the authority of the federal Bureau of Alcohol, Tobacco, Firearms and Explosives. States, cities, and counties also govern tobacco sales and use.

Examples of pertinent laws include prohibitions on smoking in public spaces, restrictions on the location or hours of operation for hookah lounges, smoke-free workplace laws, and bans on the sale of flavored tobacco.

Because of these regulations, it's critical to check with the appropriate state and local government agencies (usually the department of health or alcohol and tobacco) before embarking on your venture. It can also be helpful to hire an attorney who can assist with navigating the laws, especially because the legal landscape is evolving. You might find a clear path to opening your hookah lounge today, but new regulations might affect your business in the future.

Planning Your Hookah Lounge Business Strategy

At its core, a hookah lounge is a retail business, requiring all the elements a retail business needs—a physical location, inventory, a process for collecting sales tax, and the like.

To begin, you'll need to determine what you'll sell. Some hookah lounges also serve alcohol, food, or both. Some sell hookah and smoking accessories like shisha and pipes. Others offer music, karaoke, or live performances.

Decide on What Your Hookah Lounge Will Offer

Whether you also provide food, alcoholic beverages, or entertainment in addition to the smoking experience depends on your target market and your startup budget.

For example, if you are catering to college students, you might consider offering a menu of burgers, fries, chili, and the like. If your lounge targets older adults, you might serve alcohol. Remember, however, that a facility with a kitchen for cooking will be more costly to rent than one without a kitchen, and you'll have to obtain a liquor license to serve alcohol. Some states charge a steep price for liquor licenses.

If you offer live entertainment, you'll need additional equipment—a stage and sound system. If you provide recorded music, you'll have to license the recordings from a company such as the American Society of Composers, Authors and Publishers (ASCAP). Services like Spotify and Pandora, which offer subscriptions for individuals to access recorded music on their iPhones, don't license music for business use, and you can incur hefty fines for failing to obtain the appropriate license.

Find a Location for Your Hookah Lounge

Ideally, hookah lounges should be located in retail storefronts, visible from the street in high-traffic areas close to other night-life establishments like night clubs and bars. Hookah lounges appeal to the same customers who frequent these types of businesses.

Many municipalities, however, place restrictions on where a hookah lounge can be located. Some limit hookah lounges to certain types of commercially zoned districts, or require that they be located a certain distance from schools, churches, residences, and other businesses.

Once you've reviewed the local laws that can affect your choice of location, you'll need to consider the cost to lease space, the ease and availability of parking, proximity to public transportation, and the demographics of the area. Your municipality might also require that your facility have specific ventilation features beyond those needed for restaurants or bars.

Before finalizing your lease agreement, be certain that your property owner has obtained the appropriate Certificate of Occupancy (CO) for a hookah lounge. The CO must include a description of the property's use, and confirm that it conforms to applicable building codes and zoning laws.

Obtain Permits and Licenses for Your Hookah Lounge

You'll likely need more permits and licenses to operate a hookah lounge than you would for other types of retail establishments, because of the government agencies and laws connected with these operations. Some of the licenses and permits you might need include:

A tobacco license. You'll need to register your lounge with the Food and Drug Administration (which governs tobacco sales on a federal level) and obtain a tobacco license or permit from applicable state and city agencies.

The governing agencies at the state and city level are typically the department of tobacco and alcohol, the health department, and the department of taxation. You must display your license prominently, and you might have to post signs warning of the dangers of tobacco use.

License fees vary by state. On average, a tobacco license will cost between $50 - $300 per year, and local cities and counties might impose additional permit fees.

A liquor license. If you serve alcoholic beverages, you'll need a liquor license, usually from your state's department of alcoholic beverages. Costs vary by state, by the type of establishment, and the types of alcoholic beverages you serve (for example, whether you offer only beer and wine or a full bar); and range from a few hundred dollars to as much as $400,000. Some states also impose quotas on the number of liquor licenses they grant per year.

A food service license. If you plan to serve food at your lounge, you'll need a food service license, usually from the city or county health department. You might also need a food handler's permit for employees who are preparing or serving food.

The city or county health department will conduct an inspection to ensure that your restaurant complies with their requirements for health and safety.

A fire department permit. Local municipalities usually require that you obtain a fire safety certificate that sets limits on the number of occupants allowed in the lounge at any given time. You'll need certain equipment, such as fire extinguishers.

Parking, entertainment, dumpster, and signage permits. Some cities and counties impose additional permit requirements if you offer valet parking, live entertainment, or place prominent signage outside your lounge. You might also need a dumpster placement permit to place dumpsters in easy reach of the kitchen.

A business license. Many states require a general business license in addition to the specific licenses required by alcohol and tobacco authorities.

A sellers permit. Sellers permits are issued by states to allow them to track and collect sales tax.

A resale permit. If you are going to sell hookah pipes or other smoking accessories at retail, you'll need a resale permit so you don't have to pay sales tax on the goods you purchase for resale.

How Much Does It Cost to Open a Hookah Lounge?

Startup costs for a hookah lounge can vary from as little as $30,000 to over $200,000, depending on many factors, such as whether you also have a restaurant or bar, the size and location of the space you lease, and the number of employees.

Most hookah lounges compete based on the variety of pipes and shisha they offer, the décor, restaurant and bar offerings, and entertainment.

Some of the costs you'll need to consider in addition to permits and licenses include:

  • rent
  • tables, chairs, and decor
  • utilities, including phones, electricity, and water
  • inventory, including shisha, water pipes, food, snacks, and beverages
  • serving equipment such as dishes, flatware, and glasses
  • accounting software
  • store equipment, including a point-of-sale (POS) system, security equipment, and a sound system
  • paper and printed materials including signage, stationery, check pads, and menus
  • insurance
  • employee wages
  • kitchen equipment, including ice machines, cooking utensils, refrigerators, and freezers, and
  • marketing, including flyers, advertising, and discount promotions such as happy hours.

How Much Money Do Hookah Lounges Make?

Most hookah lounges charge by the bowl of shisha and the type of water pipe. Charges for fancy pipes that offer special filtration systems can be as high as $50, and the shisha can range between $15 per bowl, for a basic tobacco blend, to $30 or more per bowl for exotic tobaccos and flavors.

On average, the wholesale cost of shisha ranges between $1.25 - $25.00 per 250 grams (the average bowl takes about 25 grams of shisha), yielding relatively high margins for the lounge owner, provided that the hookah lounge attracts robust traffic.

But it's also important to consider that some of the more successful hookah lounges offer a full restaurant and bar along with entertainment. High-end hookah lounges can require a lot of marketing dollars to garner a steady clientele, and other startup and operating costs for these businesses can be quite high. It can take six months or more for a hookah lounge to break even, and one or more years to be profitable.

How to Set Up Your Hookah Lounge Business

Aside from the industry-specific issues you'll need to address, the steps required to set up a hookah lounge are much the same as starting any other retail business.

Write a Business Plan

A business plan helps you to think through the startup funding you'll need, how much revenue it will take to break even and turn a profit, and your strategy for achieving your goals.

Decide on a Business Structure

You can structure your business as a sole proprietorship, limited liability company (LLC), general partnership, or corporation. Each differs in the personal liability protection offered and the way the business is taxed.

LLCs and corporations offer the greatest personal liability protection because the law treats the business as a separate entity from the individual owners. Owners are usually not held responsible for the debts and obligations incurred by the business.

Owners of these business types pay individual taxes on income they receive from the business, like wages and profit distributions. The business pays taxes on the income it earns, but owners only pay taxes on the portion of income the business distributes to them.

The owners of sole proprietorships and general partnerships are personally responsible for their business debts and for paying taxes on the business's income.

Obtain an Employer Identification Number (EIN)

An EIN, which is issued by the IRS, is like a Social Security Number for your business. You need an EIN to apply for many permits and licenses, a business bank account, and to employ workers.

Select a Business Name

Your business name helps customers readily recognize your lounge. It should be unique and memorable, and it must conform to the requirements in your state. Check the website of the Secretary of State for rules about naming your business.

Unless you want to spend a lot of money marketing your lounge, choose a name that describes what you offer, such as Aladdin's Hookah Den and Cocktail Lounge. (If you choose a name that isn't immediately recognizable, like Time Out, you'll have to spend your marketing budget on teaching customers what it is you offer.)

LLCs and corporations must provide a business name with their registration application. Sole proprietorships and general partnerships are automatically registered under the owner's name. If you want to use a different name from your own, you'll have to register a fictitious business name or DBA (the abbreviation for "doing business as").

Register Your Business

LLCs and corporations must register with the Secretary of State or similar agency where they operate. Regulations for registering vary by state, but most state websites provide details about the process and allow you to register on their website.

If you structure your business as an LLC or corporation, you'll also need to designate a registered agent on your registration application. A registered agent is someone who can receive legal documents on your behalf. It can be someone within your organization or a third party, but keep in mind that whomever you choose must be reliable and available during business hours.

Obtain Insurance

Retail businesses typically carry insurance to protect the physical premises and the personal assets of the owner.

The types of insurance retail establishments carry will depend somewhat on whether the business owns the property or rents. Owners who rent most typically carry:

  • Casualty insurance: Protects against losses from fire, theft, and the like that result from your negligence or that of your guests (don't count on your homeowner's policy to cover business losses).
  • General liability insurance: Provides coverage for claims by customers and other outsiders that your business or products caused injury or damage.
  • Product liability insurance: Covers claims that the products you sell caused injury or damage.
  • Workers' Compensation insurance: Provides coverage for employees who claim injuries on the job.

Open a Business Bank Account

You'll need a separate business bank account if you structure your company as an LLC or corporation, but even sole proprietorships and partnerships can benefit from a separate bank account to help with recordkeeping. Any business will need a business bank account to apply for a loan.

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