I. INTRODUCTION & PURPOSE
Starting a restaurant in New York City is both a time consuming and arduous task even for an experienced entrepreneur. There is a maze of logistical, legal and financial hurdles that need to be overcome before your establishment is operational, let alone successful.
Contrary to popular belief, most new restaurants survive their first year. The vast majority of restaurants that fail do so because they failed to develop a clear concept or business plan for their establishment. The needs of restaurant owners are significantly different than those of other business owners and traditional approaches to the formation and successful operation of a restaurant rarely work.
My goal in developing this toolkit is to provide a resource for start-ups and existing restaurant owners that will address both legal and non-legal aspects of the restaurant industry. This tool will help you evaluate your concept in light of industry competition, economic reality and proven management practices.
DISCLAIMER: The information provided in this toolkit is intended to provide general legal principals, not legal advice regarding any specific circumstance. Readers should consult their attorney with regard to specific situations involving their business or person.
II. TABLE OF CONTENTS
I. INTRODUCTION & PURPOSE (Page 1)
II. TABLE OF CONTENTS (Page 2)
III. CONCEPT DEVELOPMENT (Page 3)
A. Concept (Page 3)
B. Due Diligence (Page 4)
C. Business Structure (Page 6)
D. Partnership Considerations (Page 8)
E. Start-up Costs & Financing Your Business (Page 13)
F. Selling or Purchasing an Existing Restaurant (Page 16)
G. Commercial Leasing – Finding Your Restaurant’s Location (Page 18)
H. Licensing & Permits (Liquor, Food Service, Sidewalk Café, Music) (Page 22)
i. Health Department Permits (Page 23)
ii. Sidewalk Café Permits (Page 23)
iii. Cabaret Licenses (Page 24)
iv. Liquor Licenses (Page 24)
v. Music Distribution Licenses (Page 27)
IV. RESTAURANT OPERATIONS (Page 28)
I. Finances & Budget Concerns (Page 28)
J. Professional Resources (Page 29)
K. Employment Handbooks (Page 29)
L. Employment Discrimination Claims (Page 31)
M. Employee Wages & Tips (Page 34)
N. Employee Documentation (Page 36)
O. Employing Illegal Aliens (Undocumented Workers) (Page 37)
P. Liquor License Violations (Page 39)
Q. New York City Health Code (Page 40)
R. Sales Tax (Page 41)
S. Insurance (Page 41)
T. Advertising & Marketing (Page 43)
U. Premises Liability (slip & falls, food poisoning) (Page 44)
V. Civil Litigation (Page 46)
V. RESOURCES (Page 47)
III. CONCEPT DEVELOPMENT
The most important step in building a restaurant is creating a concept that you are happy with. What type of restaurant do you see yourself owning and what type of restaurant does your community need? In going through this process it is important to realistically consider your personal limitations and request help where available (i.e. design, attorneys, accountants, etc.).
To begin, consider the following:
1. What type of restaurant to you plan to open (i.e. casual, fine dining, ethnic)?
2. What is the style for the restaurant (i.e. deli service, waitstaff, upscale)?
3. What is the price structure for the menu?
4. Will the décor reflect the menu concept?
5. Will you serve daily specials?
6. Will there be musical entertainment?
7. Will you cater to an after-hours crowd?
8. What will distinguish your establishment from your competitors?
9. Describe the restaurant’s atmosphere (i.e. formal or informal; soft lighting or bright; quite or loud; romantic or social; comfortable or functional)?
10. How large will your restaurant be?
11. On what days and at what hours will you serve the public?
B. Due Diligence
Consider consulting an investor to evaluate your concept even if financing is not an issue. Often what seems like a great idea may be a poor investment if external conditions are unfavorable. For example, if you want to open a Korean BBQ make sure that the customer base within your target neighborhood is sufficient to support this type of niche restaurant.
Similarly, while family style restaurants should consider the number of households in their desired neighborhood, the average income per household and household size, upscale restaurants may want to focus more on higher income neighborhoods or business centers. There are several resources in the restaurant industry that can provide you with purchasing patterns and single/family characteristics of your target neighborhood.
Competitive research is also important. Identify all similar restaurants near your proposed site and compare their menus to yours. How do your prices match up?
A restaurant’s long term success is most often the result of providing quality food and good service, while effectively marketing to the targeted demographic. Additional factors such as the site’s convenience and accessibility can have a profound impact on your ability to draw new patrons from outside areas. Consider the following:
1. How many restaurants already serve your target neighborhood?
2. How busy are the restaurants that currently serve your target neighborhood?
3. Are there any restaurants in your target neighborhood that serve a similar type of food and provide a similar type of atmosphere?
4. Do the slower restaurants in your target neighborhood appear to have any problems and if so, what are they?
5. What factors contribute to the success of the busiest restaurants in your target neighborhood?
6. What characteristics would you use to describe the neighborhood’s residents?
7. Are there sufficient residents to meet the needs of another restaurant in the neighborhood?
8. How accessible is your restaurant to customers outside your target neighborhood?
9. Have any similar restaurants gone out of business in the community recently and if so, why?
10. How well do you know your competitors’ menus, prices, financial resources, advertising promotions, customer base, and reputation in the community?
11. What do you expect your total sales volume will be for the first three years? How does your forecast compare with your competitors’ yearly sales volume as well as the market in general?
C. Business Structure (Corporation, LLC, LLP)
There are two main types of corporate business structures, those being a ‘corporation’ and the other being a ‘limited liability company.’ Corporations can be sub-typed into ‘C’ and ‘S’ Corporations which have various tax advantages and drawbacks. For the most part ‘C’ and ‘S’ Corporations are similar in that they offer limited liability protection to their shareholders up to the amount of the shareholders’ respective contributions into the corporation.
Typically, ‘C’ Corporations are large publically traded companies with numerous shareholders. Profits of a ‘C’ Corporation are taxed twice. The corporation pays income tax on the profits it generates, and its shareholders pay income tax on any distribution payments they receive from the corporation.
‘S’ Corporations are usually small, privately-held companies with no more than 75 shareholders. Each shareholder must have a valid Social Security Number issued by the United States. The benefit of an ‘S’ Corporation is that profits are taxed only when distributions are issued to shareholder members.
Limited Liability Companies (“LLC”) are similar to corporations because an LLC provides limited liability protection to its member owners. Members are only liable for the debts of the LLC up to their respective contributions, with no personal liability. As with an ‘S’ Corporation, there is no double taxation as profits are taxed only when they are distributed to its members. Unlike an ‘S’ Corporation, members need not have a Social Security Number.
Entrepreneurs considering a partnership may want to consider what is called a Limited Liability Partnership (“LLP”). An LLP is similar to an LLC in that it provides limited liability protection for the partnership. There are two critical differences between an LLP and an LLC. An LLC may have one member, but an LLP requires at least two partners. Additionally, an LLP provides liability protection to you for your partner’s misconduct or negligence. Like an LLC, partners need not have a Social Security number and profits are taxed only when a distribution is made to the partners.
When determining what your corporate structure will be, ask yourself:
1. How many owners will there be?
2. Will you need investors? Do the investors want an ownership stake in the business?
3. Will you have a partner, equity or otherwise, and if so, how many?
4. Do you desire form a large business that owns several restaurants?
5. What are the anticipated roles and responsibilities of each partner?
6. What are the anticipated commitments of each owners (time, money, resources)?
7. How will profits be split?
8. Do you anticipate opening the company to public sale?
9. Do you have or are you able to obtain a Social Security Number?
D. Partnership Considerations
Entering into a business partnership is similar to entering into a marriage. While no two partnerships are identical, there are several standard considerations that can be addressed here. Once all issues are discussed and resolved, the partnership agreement must be reduced into writing. Each partner should consult with an attorney to ensure that the written agreement is clear and unambiguous.
1. Do you and your partner(s) share similar ideals, goals and objectives?
2. Do you and your partner(s) share a similar creative vision for the restaurant?
3. How does your partner(s) handle disagreements?
4. How has your partner(s) handled prior business and personal relationships?
5. How ambitious and dedicated is your partner(s)?
6. Is one partner more committed than the other(s) to the development of your restaurant concept?
7. How many partners will there be?
8. How will tasks be assigned and whose ultimate responsibility will it be to see that each task is completed?
9. Who makes the final decisions and on what issues?
10. Will there be a hierarchy in the partnership?
11. What will each partner commit to the partnership (i.e. time, month or both)?
12. Will the partnership be an equal percentage partnership?
13. Will all partners have an equity stake in the partnership?
14. How will profits be calculated?
15. How will profits be divided?
16. How often will profits be divided?
17. Will the partners receive salaries and if so, will salaries be paid while the restaurant is in the building process?
18. Do you want a provision in the partnership agreement that terminates or abates the partners’ salaries if profits dip?
19. When disagreements arise, how will they be handled?
20. Who will be designated as being authorized to accept employee complaints, and will there be more than one person who can accept employee complaints?
21. Who will have the ultimate decision making authority on employee complaints?
22. Will each partner be required to ‘buy into’ the partnership?
23. What will the ongoing financial responsibilities of the partners be to the partnership?
24. Will bonuses be issued and if so, how often and by what measure?
25. What expenses will the partnership cover for the partners?
26. Will the partners have titles and if so, how will the titles be assigned?
27. Will all partners have access to all partnership documents including financial statements and records?
28. What is expected of each partner with respect to the advertising and marketing of your restaurant?
29. What are the hours each partner is expected to work? Do all partners possess the same work ethic?
30. Will the partnership agreement contain a buy-sell provision to protect the partnership in the event of a partnership breakdown or the bankruptcy, death or divorce of one of the partners?
31. What happens if a partner becomes disabled and is no longer able to contribute to the partnership?
32. Will the partnership agreement be flexible so that rewards and control fluctuate with the contribution and assumption of risk of the respective partners?
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James D. DiPasquale
DIPASQUALE LAW GROUP