How to Start a Restaurant Business

Are thinking about how to start a restaurant business? According to the National Restaurant Association, the restaurant industry employs over 15.1 million people in the U.S and is expected to create 1.6 million new jobs by the year 2028. Without a doubt, it’s an industry that contributes immensely to our economy. What I think is especially encouraging about the restaurant industry is that it has a track record of opening the door to entrepreneurship to people with humble beginnings who are willing to work hard and learn. Many people who start a restaurant begin by working in the kitchen or as servers, bus persons, or bartenders, etc.. Eight in 10 restaurant owners began their careers in entry-level positions.

It’s wise to seek out resources like a lawyer, tax advisor, accountant, restaurant business consultant, etc. who can help you with all of your legal, accounting, and industry-specific questions and decisions as you start a restaurant. To give you a taste of what you will need to address as you pursue your dream, I’ve created a list of some of the primary steps involved in launching a restaurant business. What I share here is not meant as legal or accounting guidance but rather to give you a general idea of what you may need to consider.

1. Make some critical decisions, and then write a business plan.

Starting and running a restaurant requires a lot of research and planning before you open your doors and begin serving customers. A business plan will help you flesh out your vision and document what you’ll need to do to get your business off the ground.

Typical sections of a business plan include:

  • Executive Summary
  • Company Overview
  • Industry Analysis
  • Business Offerings
  • Operations and Management Plan
  • Marketing Strategy
  • Financial Analysis

But before writing a business plan, you have to make some decisions and narrow down what you want your restaurant to be, who it will cater to, where it will be located, and more. Keep in mind that a business plan is a living, adaptable document. Although you’ll want to make it as accurate as possible, realize that it can be updated as circumstances change during your startup journey.

Below are some of the considerations to think about in preparation for writing your restaurant business plan:

Service Style and Food Concept

The service style and food concept might be based on your preferences, experience, geographic region, and market opportunities. These decisions will also influence the decisions that you make about your brand.

What does “service style” mean?

  • Fast Food (also known as “quick service”)
  • Casual Dining
  • Fine Dining

What does “food concept” mean?

Some possible examples include:

  • Coffee and/or bake shop
  • Sandwich or Burger place
  • Family style or buffet
  • Seafood restaurant
  • Steakhouse
  • Ethnic restaurant
  • Vegan or organic

Some restaurants combine multiple concepts into their brand. Identifying your service style and food concept will help you determine the menu that you’ll serve, the ambiance you want to provide for your customers, and other elements that will support your brand identity.

Target Market

As you think about your restaurant’s service style and food concept, also give thought to the customers you hope to attract. Describe the demographics, behaviors, and other characteristics. It may help to develop customer personas that give you a closer-to-real-life sense of your potential customers wants, needs, and challenges— for example, Mandy, a 33-year-old work-from-home mom of a toddler. She’s health-conscious and looks for fresh, delicious salads and sandwiches. She enjoys a dining atmosphere that’s casual with fast service, with Wi-Fi so she can escape her house and work remotely for a few hours each day when her mother-in-law babysits her child.

Competition

Understanding who will be vying for your customer base will help you determine how to differentiate your brand in the market. Consider your competition’s strengths and weaknesses as you decide on what unique value you can bring to consumers. There are many ways to learn about your competitors:

  • Visit their websites and assess the quality in form and function (layout, written content, photography, online ordering, chat function, etc.)
  • Check out their social media accounts to see how active and engaged they are with their followers. Also, observe what promos, events, contests, etc. they offer on social media.
  • Ask members of your target audience about what they like and dislike about your competitors’ food, service, and environment.
  • Visit your competitors’ establishments personally to get a first-hand customer experience.

Location

If you need to look for funding to launch your restaurant, you might not find it possible to secure a space at this time. However, it’s helpful to at least home in on the general area you aspire to operate—and why you find that area attractive. Consider things like the neighborhood appeal, parking availability, other destinations nearby, foot-traffic, competition in the locale, etc. These are all things potential investors may consider when deciding if they will help fund your business.

Menu

Identifying some of the food items you intend to offer when you launch will help you figure out the equipment you’ll need, experience and skills you’ll need to look for in employees, ingredient costs to anticipate, etc. You won’t need to have a fully formed menu and exact recipes at this stage of the process, but you’ll benefit from having a tentative plan for what you will sell.

Staffing Needs

Though the list will vary based on the unique needs of your restaurant business, there are a few fundamental positions you will likely need to fill when opening your restaurant:

  • Executive chef
  • General manager
  • Sous chef
  • Prep cooks
  • Servers
  • Bartenders
  • Hosts
  • Food runners and bussers
  • Dishwasher

You might also need to outsource some tasks like marketing, social media, bookkeeping, payroll, and other responsibilities that you either don’t have the knowledge or time to handle on your own.

Expense, Sales, and Revenue Projections

While it will be difficult to know for sure how much you’ll sell and what your costs will be, use the insight you’ve gained from doing research and learning about the industry to make viable assumptions to create a financial forecast as realistic as possible. Having a handle on what you might expect financially will help identify how long it may take for your business to break even and become profitable. And investors and lenders will want to see your projections as they consider whether they want to fund your business.

What investors and lenders will want to see and how they want to see it may vary. Many might want to see financial information for the first three years of the business. Among the info required might be:

  • Profit and loss (income) statement
  • Balance Sheet
  • Cash Flow Statement

Business Entity Type For Your Restaurant

Check with your state to find out which business entity types are options for you. The business structure business owners choose affects tax rates and how income taxes are applied, the owners’ personal liability related to business legal and debt issues, growth potential, and the ongoing compliance complexity of maintaining the entity.

Common business structures that restauranteurs select for their establishments include:

  • Sole proprietorship
  • Partnership
  • Limited Liability Company (LLC)
  • Corporation (C Corp)
  • S Corporation (S Corp)

Below is some basic information about each type. Licensed legal and accounting professionals can help restaurant entrepreneurs weigh the pros and cons of each and make an informed decision when selecting a business structure.

Sole proprietorship

A sole proprietorship is the most simple structure administratively; the business owner (individual or husband and wife) and the business are considered the same legal and tax-paying entity. It’s an attractive option for entrepreneurs who want to keep compliance requirements to a minimum. There are no filings required to become a sole proprietorship (other than a DBA if the business will be marketed using a fictitious name—more on that later!). The downside is that the owner could be held liable (putting their personal assets at risk) if someone sues the restaurant or the business runs into financial problems and can’t pay its bills.  A sole proprietorship’s profit and losses flow through to the owner’s individual tax returns. In addition to paying income tax on business profits, sole proprietors must also pay 15.3 percent in self-employment taxes (Medicare and Social Security) on taxable income. Throughout the year, sole proprietors must make estimated quarterly income tax payments to the IRS, state, and local governments because unlike employees, sole proprietors don’t have taxes withheld from a paycheck.

Partnership

A partnership is a business with two or more owners. Like a sole proprietorship, there usually are no formal state registration filings to become a partnership. The business and its owners (partners) are considered the same legal and tax paying entity. Partners assume legal and financial liability for the business, and tax obligations flow through to the owners’ individual tax returns. Partners also pay self-employment tax on their share of the restaurant’s profits. Partnerships usually have a partnership agreement that sets forth the roles and responsibilities of each owner and how profits should be distributed among the partners.

Limited Liability Company

An LLC can have one (single-member LLC) or multiple (multi-member LLC) owners. The LLC entity type provides legal separation between an LLC’s members (i.e., its owners) and the business, so members have peace of mind that their personal assets are protected in the event of legal or financial hardships of the restaurant. By default, an LLC is treated as a pass-through entity for income tax purposes with profits and losses flowing through to the members’ individual tax returns. Members must also pay self-employment taxes on their income from the business. An LLC’s members roles and responsibilities are laid out in an Operating Agreement, and an LLC may be either member-managed or manager-managed.

The LLC structure allows for some tax flexibility; it may be elect to be taxed as an S Corporation, which may help members lower their self-employment tax burden. As an S Corp, business profits still flow to the members’ tax returns, but members pay self-employment taxes only on wages and salaries that they get via a paycheck from the S Corp—income given as “distributions” are not subject to Medicare and Social Security taxes.

C Corporation

Incorporating a restaurant ensures the most personal liability protection for business owners (called “shareholders” in a corporation). A C Corp is a separate entity legally and financially; as such, it files its own tax return and pays income taxes at the applicable corporate tax rate. One thing to consider is that C Corps underdo something many refer to as “double taxation.” In a C Corporation, business profits get taxed at the corporate level, and then the portion of those profits that go to shareholders as distributions get taxed again at the individual income tax rates on shareholders’ personal tax returns.

Note that corporations that meet the IRS’s criteria have the option of electing S Corp tax treatment. By doing so, they can avoid double taxation, as business profits flow through to the individual shareholders rather than getting taxed at the corporate level on a corporate return. One potential advantage of a C Corp is that many lenders and investors will only consider funding restaurants that are incorporated. Also, corporations allow for the sale of stock to raise money.

Corporations have more strict compliance measures to fulfill, which might include forming a board of directors, adopting bylaws, annual reports, and other filings. The requirements vary by state.

S Corporation

Many people think of an S Corporation as an entity type, but it’s simply a tax election option for qualifying LLCs and Corporations. As I explained in the sections above, electing S Corp tax treatment may benefit restauranteurs who either want to minimize their self-employment tax burden or avoid corporate double taxation.

In addition to talking with legal and accounting professionals to determine the best structure for your restaurant, check out CorpNet’s Business Structure Wizard to get an idea of which entity type might be a good fit.

Business Name

Consider your food and brand concepts as you select a name for your eatery. A name will be one of your most valuable branding assets, so you’ll want it to make the right impression and be memorable. You’ll also want to make sure you’re allowed to use the name. If another similar business is already using it, you could land in legal hot water if you start marketing your restaurant under the name.

An attorney can help check a business name’s availability, and CorpNet has a free business name search tool that can help identify if a name is already in use in the state where the restaurant will be operated. CorpNet also has a trademark search tool to see if any other businesses in the U.S. have applied for or been granted a trademark for the name.

If you form an LLC or C Corporation, your business name will automatically be registered with your business. Sole proprietorships and partnerships that intend to use a name that does not include the owner’s legal name must file to use their desired name as a DBA (“Doing Business As” or “Fictitious Name.”

2. Determine the funding you’ll need and seek to secure it.

The type of restaurant, real estate or rental costs, equipment needs, staffing requirements, license costs (liquor licenses are especially costly), website development, advertising, and other factors will affect how much you’ll need to start a restaurant. And then there will be the capital you’ll need to have on hand to cover your ongoing operating expenses as your business starts to generate income.

Some possible sources of money to fund your startup costs include:

  • Your personal assets
  • Friends and family members who are willing to invest in your venture
  • Business or partners (one or more people who will take on ownership with you)
  • Banks or credit unions
  • Local, state and federal government programs – The SBA and Small Business Development Centers are useful resources. Also, consider checking the local library in your area. Some libraries have business librarians who are knowledgeable about where to find information about funding options.

3. Designate a registered agent.

If a restaurant will form an LLC or incorporate, it must designate a registered agent in the state(s) where it is registered. A registered agent maintains office hours Monday through Friday from 8 a.m. to 5 p.m. to receive “service of process (official government notices and legal paperwork) on the business’s behalf. Some states allow business owners to serve as their own registered agent, but it can be helpful, since a registered agent’s address becomes public record, to use a third-party registered agent to protect an entrepreneur’s privacy. Having a registered agent, like CorpNet, that can offer its services in all 50 states can make things easy if a restaurant will expand into other states in the future.

4. Register your business with the state.

A restaurant that will operate as an LLC or a C Corporation must file registration paperwork with the state.

  • LLC – Articles of Organization
  • C Corporation – Articles of Incorporation

The state might also require other filings or reports, as well, such as an initial report.

LLCs and Corporations that want to file for S Corp election must also submit IRS Form 2553.

An attorney can assist restauranteurs in completing and filing their business formation paperwork. Businesses that want to reduce their legal fees can instead use a business document filing service, like CorpNet, to ensure their business registration filings are handled accurately and cost-effectively in any of the 50 states.

5. Obtain an EIN.

An EIN (Employer Identification Number) from the IRS serves as a unique ID number (similar to a Social Security Number) for a business. Many banks will require that a business has an EIN before they will open a business bank account for a restaurant. Any business that will hire employees must have an EIN. Some other paperwork and filings that a restaurant must submit might also request to have the business’s EIN number.

The IRS issues EINs at no charge, and the application is rather simple. Entrepreneurs that don’t feel comfortable with handling it themselves can ask CorpNet to submit the form for them.

6. Open a business bank account.

Regardless of the business entity type, it’s always beneficial to keep a restaurant’s financial records and funds separate from the owners’ records and accounts. In the case of LLCs and corporations, it’s absolutely imperative because mixing personal and business finances could result in losing the status of legal separation between owner and business. That could put the business owners at risk of having their homes, savings accounts, vehicles, and other assets used in lawsuits or to pay down business debt.

After a restaurant’s business entity is formed, it’s time to open a business bank account and credit accounts so expenses can be paid from the funds in those accounts and any revenue from customers can go to the appropriate place.

7. Understand health and safety regulations before you start a restaurant.

You’ve probably seen those restaurant inspection reports in the newspaper. Of course, no restaurant wants to be called out for violations or put their customers or staff at risk, so that’s why it’s critical to understand health and safety laws. Fortunately, many state and regulatory agencies will work cooperatively with restaurateurs to help them understand the rules and guide them in what they must do to comply with the requirements.

8. Secure your location, do any necessary renovations or remodeling, order restaurant equipment, and find food suppliers, etc.

Stating the obvious, before you can open a restaurant, you need to find a home for it and equip that space with everything you’ll need to create your menu items and serve your customers. This is an excellent time to revisit your business plan where you’ve identified many of the things you must take care of to make your restaurant operational. As you check items off of your list, you may also want to update your business plan if you discover your actual costs are higher or lower than you anticipated.

9. Get the permits and licenses you’ll need to start a restaurant and operate it legally.

New restaurants will need to apply for a variety of permits and licenses. Several examples of possible requirements include:

  • Business License
  • Seller’s Permit (to collect and remit sales tax)
  • Food Service License
  • Food Handler Permit
  • Certificate Of Occupancy
  • Sign Permit
  • Liquor License
  • Music License
  • Resale Permit
  • Health Permits (Building and Employee)

An attorney can provide guidance to make sure no necessary permits and licenses get missed. After you’ve identified what your restaurant will need, CorpNet can save you time and hassle by preparing and submitting the permit and license applications for you.

10. Hire employees.

As you look for qualified, dependable staff members for your restaurant, it’s critical to understand all of the laws employers must abide by. An HR consultant can help make sure you conduct the hiring process correctly and comply with requirements after you’ve brought staff on the payroll.

Your job applications and job interviews must follow all applicable hiring and anti-discrimination laws. Also, learn about applicable minimum wage and child labor laws. Restaurants often hire teens, and there are restrictions on the number of hours they’re allowed to work and the tasks they’re permitted to perform.

Restaurants must also make sure payroll is set up correctly, calculating employee paycheck withholdings (e.g., income tax, FICA tax, workers compensation insurance, and tip income) accurately.

Also, have a training plan in place to onboard new employees and to give existing employees an opportunity to sharpen and expand their skills.

11. Promote and advertise your restaurant.

A “build it and they will come” mentality to starting a business rarely leads to success; it’s critical to actively market and advertise a restaurant. Get all your branding and marketing assets up and running so that you can use them to promote your restaurant and give people the information they need before they visit.

  • Website
  • Social media
  • Business cards
  • Flyers
  • Take-along menus
  • Email marketing

Consider having professionals handle the design, writing, and photography for your marketing assets because the quality of those things will reflect on your brand. Also, claim your listings on review sites like Google My Business, Yelp, TripAdvisor, and others so that customers can share about their experience at your restaurant. According to a report by BrightLocal, 86 percent of consumers read reviews for local businesses. (Tip: Read each review site’s terms of use and policies carefully. Some prohibit businesses from explicitly asking customers to leave reviews.

12. Keep your restaurant legally compliant.

Restaurants must remain up to date on all tax filings, reports, licenses, and other compliance requirements to stay in good standing with the state and local governments and the IRS.   Attorneys and tax professionals can advise on what must be done and when. CorpNet’s B.I.Z. (Business Information Zone), a free online portal, can also help you keep track of upcoming reporting and filing deadlines.

13. Know where to find information and guidance to help you learn how to start a restaurant.

If it sounds like there’s a lot to consider and do when you start a restaurant, you’re right! But you don’t have to—and you should not attempt to—go it alone. Below, I’ve listed some resources that you might find helpful as you work through the process of making decisions and taking action to launch your restaurant:

And for all of your business registration, registered agent, license application, and other filing needs, you can count on CorpNet for assistance. Our team of experts will help you streamline your efforts to start a restaurant business—and save you time and money. Contact us today!

2019-04-04T12:44:35-07:00 April 9th, 2019|Categories: Startup and Launch|Tags: , , , |

About the Author:

Nellie Akalp
Nellie Akalp is an entrepreneur, small business expert, speaker, and mother of four amazing kids. As CEO of CorpNet.com, she has helped more than half a million entrepreneurs launch their businesses. Akalp is nationally recognized as one of the most prominent experts on small business legal matters, contributing frequently to outlets like Entrepreneur, Forbes, Huffington Post, Mashable, and Fox Small Business. A passionate entrepreneur herself, Akalp is committed to helping others take the reigns and dive into small business ownership. Through her public speaking, media appearances, and frequent blogging, she has developed a strong following within the small business community and has been honored as a Small Business Influencer Champion three years in a row.

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