This year has been projected as a growth year for the restaurant industry, creating opportunities for entrepreneurs who dream of opening their own restaurant. Forty-seven percent of Americans’ food dollars are spent dining away from home, and restaurant sales are expected to hit a record high this year, outpacing overall economic growth for the 15th consecutive year, according to the National Restaurant Association (NRA). For those looking to take advantage of the industry’s growth, the key depends not only on the restaurant’s unique concept and operating costs decisions but also on meeting specific legal and regulatory requirements.
Selecting a business structure is important to securing financing. Although restaurateurs can operate as a sole proprietorship or a general partnership, significant advantages exist for incorporating or forming a Limited Liability Company (LLC).
Selecting a business structure makes a statement that you are serious about your restaurant as a viable business, increasing your financing options, and boosting your credibility with vendors. Operating as a corporation or LLC makes it easier to expand operations and to obtain equity financing by bringing in new owners and protects your personal assets from business risks. And if a franchise is of interest, many franchisors require their franchisees to incorporate a business.
Protecting personal assets is especially important with restaurants, which have more exposure to liability than many other types of businesses. Restaurants face unique risks like lawsuits arising from food-related illness, allergic reaction, or injury, to name a few. Litigation over wage and hour issues, like tips and compensation, is another high-risk area for restaurants. In fact, the U.S. Department of Labor classifies restaurants as a "high-risk industry" for Federal Labor Standard Act violations.
For most small business owners, the LLC is the business structure of choice because of the management flexibility it offers and because it has fewer state-imposed formalities. In addition, unlike with a corporation, the profits and losses from the business can be allocated to members any way they choose, regardless of an individual member’s ownership stake.
Before selecting the business structure for your restaurant and filing the appropriate paperwork, it’s a good idea to consult with an accountant to make sure that it’s the best short and long-term option for the business. Once you’ve made the decision, you can work directly with a legal compliance solutions provider to properly file the necessary paperwork.
Restaurants also face numerous state and local licensing requirements, in addition to health and safety requirements. In many cases, a restaurant will be required to have both state and local permits or licenses. The licenses you will most likely need include business licenses usually from local governments, tax permits from the federal and state government, and an occupancy permit from local governments who often have specific codes that must be met. Restaurants may also need a signage permit, an alarm permit, and a zoning and/or building permit for those building or remodeling a business property.
Multiple government agencies determine the appropriate permits and requirements necessary to obtain them. Complying with these requirements can be tedious work, but it is necessary work to ensure the success of a restaurant. Recognizing this, many restaurant entrepreneurs rely on a legal compliance solutions provider to gather and submit information specific to the territory where the restaurant will do business.
While every business is likely to need some types of business permits, restaurants are also subject to health and safety requirements.
Before you can open your doors, your local health department will inspect your premises to ensure food safety standards are met. Many of these standards relate to food storage, sanitation, and preparation, but some states also require proof that one or more workers are certified as food safety managers. And, a few states, such as Rhode Island, require allergen safety training. Once the requirements are met and the inspection is completed, you will be issued a license to operate your restaurant.
Virtually every jurisdiction—including the federal government—has special licensing requirements for an establishment that serves alcohol. Many states require the operator of the establishment to attend responsible beverage server training through a state approved program and some extend the training requirement to anyone who will be serving liquor. And, some states such as Illinois do not have a state-level training requirement, but may have city- or county-level training requirements. In addition, some states, such as Wisconsin, limit the type of licenses that are available to a foreign entity, and others, such as Ohio, have limitations on the number of permits that can be issued.
As entrepreneurs start their journey to becoming restaurateurs, they should talk to an expert about how to strategically choose the right type of business structure, obtain business licenses and understand all the health and safety requirements in their jurisdiction.