Are you thinking about how to start a restaurant business? Without a doubt, it’s an industry that contributes immensely to our economy. According to statistics from the National Restaurant Association, there are over one million restaurant locations in the United States, and they collectively employ 15.6 million people. 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 started their careers in entry-level positions.

Even in challenging times like the COVID-19 pandemic of 2020, people look to restaurants to break their day-to-day monotony and treat themselves to something special. Eating at or ordering take-out from local restaurants also gives area residents a feeling of community by supporting a neighborhood business.

I suggest that, before starting a restaurant, you seek resources, like a lawyer, tax advisor, accountant, and restaurant business consultant, etc., who can help with your legal, accounting, and industry-specific questions and decisions. To give you a taste of what you will need to address, I’ve created this guide to step you through many of the critical actions required to launch a restaurant business.

This article will cover 16 important steps to successfully opening a restaurant:

  1. What’s in a restaurant business plan (including a list of many general and restaurant industry-specific startup and ongoing considerations and costs)
  2. Where to get funding
  3. Selecting a business name (and a domain name)
  4. Choosing a business entity type
  5. Designating a registered agent
  6. Registering your business with the state
  7. Obtaining an EIN
  8. Opening a business bank account
  9. Understanding health and safety regulations
  10. Securing your restaurant location
  11. Getting the required restaurant permits and licenses
  12. Hiring employees
  13. Registering for payroll taxes
  14. Promoting and advertising your restaurant
  15. Keeping your restaurant legally compliant
  16. Business resources (including several that address COVID-19 issues—for restaurateurs)

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.

Step 1. Write a Restaurant Business Plan

Starting and running a restaurant requires a lot of research and planning before opening your doors and 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
  • Market Analysis (Industry, Competition, Target Market)
  • Business Offerings (Including a sample menu)
  • Operations and Management Plan
  • Marketing Strategy (including samples of the brand’s design elements and rendering of the restaurant)
  • Financial Analysis

But before writing a business plan, you have to make some decisions and narrow down what you want your restaurant to be, whom 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.

1. 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 other choices you make about your brand.

What does “service style” mean?

  • Fast food (quick service) – These restaurants offer a limited menu of items (prepared quickly and at comparatively low prices), and casual seating arrangements. Often, their food is sold through drive-through windows and on a take-out and delivery basis.
  • Casual dining (midscale) – These restaurants provide a happy medium between fast food and upscale dining experiences. Customers can get full meals and usually a broader selection than at a quick-service eatery at price points considered a reasonable price for the value. Some midscale restaurants provide full-service, having customers order from and get served at tables. Others have counter-service for ordering and then deliver food to the customers’ tables.
  • Fine dining (upscale) – Upscale restaurants cater to customers who want quality cuisine and ambiance and are willing to pay more for that experience. They offer full table service, and skilled, educated chefs or cooks often prepare their food.

What does “food concept” mean?

The food concept that a restauranteur selects will contribute to setting customer expectations and lay the foundation for structuring the eatery’s operations.

Some possible examples include:

  • Coffee or bakeshop
  • 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.

2. Target Market

As you think about your restaurant’s service style and food concept, think about the customers you hope to attract. Describe the demographics, behaviors, and other characteristics. Developing customer personas that give you a closer-to-real-life sense of your potential customers’ wants, needs, and challenges can help you zero in on that.

Here’s an example of what a customer persona may look like:

Mandy, a 33-year-old work-from-home mom of a toddler, is health-conscious and looks for fresh, delicious salads and sandwiches. She enjoys a dining atmosphere that’s casual with fast service and Wi-Fi. She loves to escape her house and work remotely for a few hours each day when her mother-in-law babysits her child.

3. Competition

Understanding who will be vying for your customer base will help you determine how to differentiate your brand. 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. Observe what promos, events, contests, and other enticements they offer on social media.
  • Ask members of your target audience what they like and dislike about your competitors’ food, service, and environment.
  • Visit your competitors’ establishments personally to get a first-hand customer experience.

4. Location

If you need to look for funding to launch your restaurant, you might not find it possible to secure a space. 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.

5. Menu

Identifying some of the food items you intend to offer will help you figure out the equipment you’ll need, experience and skills you should look for in employees, ingredient costs to anticipate, and more. 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.

6. Factors Affecting A Restaurant’s Revenue Potential

Some of the considerations that will affect your revenue potential and profitability include:

  • Size of your kitchen – This will impact how much equipment you can accommodate and the amount of food you can prepare each day.
  • Size of your staff – How many people you employ will also affect your output each day.
  • Hours of operation – Generally, the more hours a restaurant is open, the greater opportunity it has to sell its items. Keep in mind that you’ll be paying staff members whenever you’re open for business. Depending on your location, the economy, and other factors, being open longer might not yield a positive financial outcome.
  • Seating capacity – This is particularly important when the state or local government restricts (such as during the COVID-19 pandemic) how many people a restaurant may serve at any given time. Limited seating capacity reduces sales potential.
  • Fluctuation in ingredient costs – Supply and demand may play in favor of or against restaurateurs. It’s helpful to discuss potential cost concerns with vendors and suppliers when negotiating agreements with them.
  • Restaurant startup and ongoing costs – Below, I’ve created a list of some of the expenses restaurateurs must consider.

7. Restaurant Startup and Ongoing Costs

This list is not exhaustive, and not every establishment will need all of it. Still, I hope it will help you wrap your mind around many of the expenses restaurants encounter.

  1. Construction or renovation costs
  2. Mortgage, lease, rent payments
  3. Business registration and annual compliance filings
  4. External professional support
  5. Commercial kitchen and bar equipment
  6. Furniture and decor
  7. Delivery vehicle(s) and associated costs
  8. Restaurant business licenses and permits
  9. Restaurant management software
  10. Business insurance
  11. Staffing
  12. Taxes
  13. Menu ingredients and Beverages
  14. Utilities
  15. Marketing

Let’s take a closer look at each of the cost items above:

1. Construction or Renovation Costs

Will you be building a new structure or remodeling an existing commercial property? Both will require dealing with a general contractor or subcontractors with specialties in various areas of construction. For example, you may need professionals who specialize in the design, carpentry, flooring electrical, plumbing, drywall and painting, heating, and air conditioning.

2. Mortgage, Lease, and Rent Payments

Whether buying, leasing, or renting real estate for a restaurant, there are upfront and monthly costs to bear. It’s critical for long-term success for a restaurant to cover these costs so that it can sustain its operations. According to a blog article by Mark Chase, President of Restaurant Real Estate Advisors, “The general rule of thumb is your total occupancy cost (rent and additional fees for property taxes, insurances, etc.) 6-10% of your gross sales. The numbers that are right for your business may be lower or higher depending on other factors.”

3. Business Registration and Annual Compliance Filings

Will you form an LLC or a corporation? There will be fees payable to the state to officially register your business and ongoing reporting and filing requirements to comply with.

Later in this article, I will share information about various business entity types you may want to discuss with your attorney and tax advisor. Potential advantages of some business structures over others include personal liability protection for the owner, tax flexibility, and management flexibility. 

4. External Professional Support

Consider the professional guidance and support you’ll need from professionals such as accountants, attorneys, bookkeepers, IT technicians, business consultants, and marketing professionals. They will likely play an essential role in starting and running your business successfully.

5. Commercial Kitchen and Bar Equipment

The equipment, appliances, and tools a restaurant will need to depend on its size, menu offerings, concept, and other factors. Some necessities might include:

  • Ovens
  • Ranges
  • Grills
  • Deep fryer
  • Steam table
  • Prep table
  • Ventilation system
  • Walk-in coolers, refrigerators
  • Microwaves
  • Freezers
  • Ice maker
  • Washing station, commercial dishwasher
  • Rubber floor mats
  • Slicers
  • Mixers
  • Cutting boards
  • Saucepans
  • Saute pans
  • Stockpots
  • Baking pans and sheets
  • Mixing bowls
  • Food storage containers
  • Spatulas
  • Chef’s Knives
  • Tongs
  • Whisks
  • Commercial can opener
  • Appetizer, entree, salad, and dessert plates
  • Soup bowls and crocks, pasta bowls
  • Ramekins
  • Silverware
  • To-go containers
  • Glasses and cups
  • Hand soap and hand sanitizers
  • Paper products (napkins, paper towels, hand wipes, etc.)
  • Cleaning products
  • Dish soap and sanitizer

6. Furniture and Decor

Your restaurant’s size, service style and concept, target market, and theme will play a role in the furnishings and decor it will need to set the appropriate ambiance for customers. It may help to consult with an interior design specialist who can offer advice and suggestions for achieving the atmosphere you want for your restaurant while staying within your budget. Also, consider perusing Pinterest for ideas to get your creativity flowing.

7. Delivery Vehicle(s) and Associated Costs

Some of the possibilities include loan payments, vehicle registration, maintenance and repairs, insurance, fuel expenses, and marketing wrap or custom paint.

8. Restaurant Business Licenses and Permits

Restaurant business license requirements will vary depending on the type of service provided and the eatery location. Several types of licenses and permits a restaurateur may need include:

  • General Business License – Provides permission to operate the business at its location.
  • Food Service License – Usually involves an inspection by county or city health department officials to verify the restaurant follows food preparation, storage, and safety regulations. Employees may need to complete a food safety program and attain a food handler permit for the restaurant to obtain a Food Service License.
  • Food Handler Permit – A permit that officially certifies an employee has completed a food safety course approved by the state.
  • Liquor License – This license or permit is required for bars and restaurants to serve beer, wine, or liquor. The costs and types (classes) of liquor licenses available vary according to state and local government agencies’ rules. While it may cost one to several hundred dollars to apply for a liquor license, the license itself may cost thousands of dollars. Many counties restrict the number of licenses granted in their jurisdiction. Some municipalities are “dry,” not allowing alcohol to be sold there. In areas where no additional licenses are allowed, a restaurateur will need to buy a license from another establishment (or from the existing restaurant owner if purchasing a current establishment) or a broker. Examples of the classes of liquor licenses that might be available in your area include:
    • Beer and wine – Only allows the establishment to serve these types of alcoholic beverages.
    • Tavern – Typically applies to establishments with half their sales coming from alcohol sales rather than food.
    • Restaurant – Generally, an establishment may only have a certain percentage of its sales coming from alcoholic beverages to obtain this license, which allows for the sale of beer, wine, and liquor.
  • Sales Tax License (Seller’s Permit) – In states or localities that charge sales tax on food sold in restaurants, the business owner must obtain a sales tax license. Sales tax is calculated as a percentage (for example, in Pennsylvania, the tax is 6 percent) of the item’s price, which is added to the customer’s bill. A restaurant must periodically report the sales tax it has collected and then remit that amount to the state or local tax authorities.
  • Music License – Restaurants must comply with copyright laws before playing music in their establishments. While playing music transmitted by the radio and TV typically does not require a license. However, a restaurant that plays music through streaming subscription services, CDs, bands, and other sources will probably be subject to music licensing fees.

9. Restaurant Management Software

Restaurants must have the ability to successfully and conveniently (for them and their customers) take orders and accept payments. They must also have other capabilities to operate efficiently and manage their financials. Whether using an all-in-one platform with a  broad range of functions or several software services that integrate to provide a comprehensive solution, managing payroll and tracking sales, expenses, and inventory are essential responsibilities.

Many software platforms are available. Below, I’ve listed several that cover different needs. You can find out more about what they do and what systems they can integrate with by visiting their websites.

Restaurant Management Software

  • Restaurant365
  • Toast
  • TouchBistro
  • Upserve
  • Square POS
  • QuickBooks POS

Accounting and Payroll Software

  • Intuit QuickBooks
  • Sage Intacct

Payroll Processing Software

  • Gusto
  • ADP
  • Paychex
  • Deluxe Payroll

Many other software platforms are available. Carefully consider your type of restaurant, the capabilities you want, your budget, and other factors when deciding which one will serve your needs.

10. Business Insurance

To use a food metaphor, like ice cream, business insurance for restaurants comes in different “flavors.” Restaurateurs may find that it’s best to have a combination of coverage in their business owner’s policy to protect themselves and their business adequately. Various types of coverage a restaurant may need include:

  • General Liability Insurance – This type of insurance covers customer injuries (e.g., slips, falls, etc.), property damage, and other claims of harm or negligence presented in a lawsuit.
  • Workers’ Compensation – This mandatory insurance paid by employers covers employees’ medical expenses, lost wages, funeral costs, etc. in the event of work-related accidents and illnesses. Laws and requirements for workers’ compensation vary by state.
  • Unemployment Insurance – Unemployment insurance, a federally mandated program, temporarily replaces some of the wages that workers have lost if they were laid off or let go through no fault of their own. The program is funded by employers, who must pay into FUTA (Federal Unemployment Insurance Act) as part of their payroll taxes. The FUTA tax paid corresponds to an employee’s wages and is not deducted from the employee’s paycheck. In most states, there is also SUI (State Unemployment Insurance)—or SUTA (State Unemployment Tax Act)—tax. I’ll provide more detail about this in the soon-to-follow payroll section.
  • Commercial Property Insurance – This insurance coverage protects not only the building but also what’s within and outside of it from damages related to fire, storms (not usually floods, though), burst pipes, vandalism, and theft. Generally, earthquakes and floods are not covered unless explicitly added to the policy. Besides the building, some of the other items usually protected in the coverage include signage, furniture, restaurant equipment, computers, important paperwork, landscaping, and employees’ and customers’ personal property on-site.
  • Business Interruption Insurance – If a disaster forces a business to close temporarily, this type of policy helps pay for expenses and compensate the restaurant for lost revenue. Look at these policies carefully to understand what they do and do not cover. Sadly, during the COVID-19 crisis, many entrepreneurs discovered that their policies exclude losses due to pandemics.
  • Food Spoilage Coverage – This coverage helps restaurants recover the costs of food and beverages that go bad if certain unforeseen circumstances, like an extended power outage or equipment breakdown, occur.
  • Food Contamination Coverage – It’s scary to think about, but the risk exists that menu ingredients delivered to a restaurant might carry food-borne bacteria that could make customers ill. Moreover, restaurant staff might unknowingly be sick and pass along bacteria or a virus to patrons. Food contamination coverage may help reimburse for lost income if the restaurant must shut down temporarily. It might also cover the costs to replace contaminated food, deep cleaning of equipment and the facility, medical testing of staff, and other expenses.
  • Liquor Liability Insurance – This may be optional or required (depending on the state where the restaurant is located) if an establishment will serve liquor. This type of policy provides coverage for legal claims associated with selling alcohol to an intoxicated person who damages property or harms someone else.

An attorney and trustworthy insurance agent can help you determine the types of business policies and coverage that will offer the most peace of mind and protection for your restaurant.

11. Staffing Costs

Nearly every type of restaurant needs employees. That means there will be wages and other associated costs to hire, train, and maintain them.

Though the list will vary based on your restaurant business’s unique needs, 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
  • Delivery drivers

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.

Turnover in the restaurant industry is quite high. Besides a competitive hourly rate, restaurants may find it’s worthwhile to provide perks or benefits to attract and retain reliable employees. Some of the possible non-wage expenses related to hiring and maintaining a staff include:

  • Training
  • Free or discounted employee meals
  • Uniforms and accessories
  • Paid time off
  • Sick leave

Also, depending on the number of employees a restaurant hires and the number of hours employees work, a restaurant may be required to offer a group health insurance plan.  

12. Taxes

Unlike sales tax, which is a pass-through tax, restaurants may be subject to other taxes that impact their net income.

  • Federal income tax
  • State income tax
  • FUTA tax (federal unemployment)
  • SUI tax (state unemployment)
  • FICA (Social Security and Medicare taxes – FICA tax is paid by both the employee and employer. 7.65 percent of an employee’s wages must be withheld from each paycheck, and then the employer must pay a matching 7.65 percent.

There may be other taxes and fees depending on the type of business and its location.

13. Menu Ingredients and Beverages

Restaurants will incur the ongoing costs of purchasing an inventory of food, beer, wine, spirits, and mixers to fulfill its menu offerings. According to Upserve, food costs typically range from 28 percent to 40 percent of a restaurant’s revenue. Consider talking with other restaurateurs about recommendations on suppliers and vendors. Finding attractive wholesale prices will directly impact profitability, but also consider the quality, reliability, and responsiveness of vendors.

14. Utilities

A few of the essentials include phone service, heat, electric, water, sewer, and internet access. Depending on the type of restaurant, you might also want cable TV or satellite TV service as a source of entertainment for your customers. If you have multiple service provider options at your location, do your homework to determine which offer reasonable pricing and have received high marks in the community for their service quality.

15. Marketing

Digital marketing expenses could include website development, web hosting, domain name registration, social media management, copywriting, photography, and logo design.

Also, even in the digital age in which we live, restaurants usually need a variety of print collateral to market their business to prospective customers. Some items to consider include:

  • Signage
  • Menus (in-house and for take-out)
  • Branded receipts
  • Comment cards
  • Direct mail postcards
  • Table tents
  • Coupons
  • Flyers

Keep in mind that in addition to the printing costs, there may also be design, photography, copywriting, mailing, and postage costs associated with these branding assets.

9. Financial Projections

While it will be challenging to know exactly how much you’ll sell and your costs, 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 wish 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

Step 2. Get Funding

The type of restaurant, real estate or rental costs, equipment needs, staffing requirements, license and insurance costs, 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.

Step 3. Select a 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.

1. Perform a Domain Name Search

First, it could be beneficial to check if the domain name is available to match what you want to call your restaurant. Having a website URL that will match your business name can help people find your restaurant online more readily. For example, if I want to review Arby’s menu, I can intuitively type in “arbys.com” to get to the restaurant’s website. That’s not always the case with local restaurants, however. If they’ve registered a business name and couldn’t secure the domain name to match it, it could confuse customers. Several tools that allow you to check if a domain name is available include:

  • Whois.net
  • Domain.com
  • GoDaddy
  • Nameboy

If you’re attached to a business name, but the corresponding domain isn’t available, WPBeginner offers the following suggestions for finding a suitable name for your website.

  • Look for .com domain names rather than other domain extensions (e.g., .net).
  • Use keywords related to your business.
  • Avoid using numbers and hyphens in your domain name.
  • Select a domain name that people can remember and spell easily.

2. Perform a Business Name Search

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”).

Step 4. Choose a Business Entity for Your Restaurant

Check with your state to find out which business entity types are options for you. The business structure 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 restaurateurs 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. 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 each owner’s roles and responsibilities 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. An LLC may be either member-managed or manager-managed.

The LLC structure allows for some tax flexibility; it may 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 Corporation 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. Then, the portion of those profits that go to shareholders as distributions gets 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 merely a tax election option for qualifying LLCs and Corporations. As I explained in the sections above, electing S Corp tax treatment may benefit restaurateurs who 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.

Step 5. 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. Still, 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.

Step 6. 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 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 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.

Step 7. 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. This is also called a Federal Tax ID Number.

Many banks will require that a business have an EIN before opening a business bank account for a restaurant. Any company 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.

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

Step 8. 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 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 to pay damages in lawsuits or other business debt.

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

Step 9. Understand and Comply With Health and Safety Regulations

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.

Restaurants must follow OSHA rules for protecting employees from workplace injuries and hazards. States (and sometimes local government agencies) also have food service regulations that restaurants must follow.

Since the advent of COVID-19, restaurants are under increased requirements and scrutiny. Because the rules are continually changing due to the virus’s evolution and its impact on communities, it’s essential to stay on top of the current regulations. Moreover, it’s critical to make sure your staff is aware of any new or modified policies and procedures that they must follow to keep all employees and customers safe.

Step 10. Secure and Prepare Your Restaurant Location

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 and review the things you need to make your restaurant operational. As you check items off your list, you may want to update your business plan if you discover your actual costs are higher or lower than you anticipated.

Step 11. Get the Required Restaurant Permits and Licenses

Earlier, I mentioned many of the possible licenses and permits a restaurant will need to operate and serve the public legally. Business owners should contact their state and local government offices to determine the requirements in their area for the type of restaurant they will operate. CorpNet can also help identify the necessary licenses and permits—and prepare and submit the applications to obtain them—through our Business License Service Packages.

Step 12. 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 ensure 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.

Also, have a training plan to onboard new employees and allow existing employees to sharpen and expand their skills.

Step 13. Register for Payroll Taxes

Restaurants must also make sure they register for state payroll tax accounts. There are payroll-related taxes that the employer pays, such as FUTA. Some taxes must be withheld from employee paychecks, such as State Unemployment Insurance Tax (SUI) and State Income Tax (SIT). Usually, SUI must be paid by the employer, but in some states, SUI is also withheld from the worker’s pay. SUI rates vary by state. Both federal income tax and SIT must also be withheld from workers’ pay. As I mentioned earlier, business owners must withhold FICA and income tax from employees’ wages, too.

Employers then report and remit employment taxes to the appropriate tax agencies.

Step 14. 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.

Step 15. 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 to do and when. CorpNet’s B.I.Z., a free online portal, can also help you track upcoming reporting and filing deadlines.

Step 16. Know Where to Find Help

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 making decisions and taking action to launch your restaurant.

COVID-19 Resources for Restaurants

As the pandemic—along with restaurant requirements and restrictions—continue to evolve, I also want to share some resources that may provide helpful information for starting a restaurant during the COVID-19 crisis.

Let’s Get Cooking Together!

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!


References and Sources:

“Restaurant Industry Facts at a Glance.” National Restaurant Association; https://restaurant.org/research/restaurant-statistics/restaurant-industry-facts-at-a-glance. Accessed July 27, 2020

“How to Start a Restaurant.” Entrepreneur.com. https://www.entrepreneur.com/article/73384. Accessed July 22, 2020

Chase, Mark (2020, June 11). “Rent for Restaurants – What is the right rent for restaurants?”. Restaurant Real Estate Advisors. https://restaurantrealestateadvisors.com/rent-for-restaurant. Accessed July 24, 2020

Van Duyne, A. “How to Open a Restaurant With No Money.” On the Line (a publication from Toast). https://pos.toasttab.com/blog/on-the-line/how-to-open-a-restaurant-with-no-money. Accessed July 22, 2020

“Obtaining a Liquor License for Your Bar.” Dummies. https://www.dummies.com/business/start-a-business/business-plans/obtaining-a-liquor-license-for-your-bar. Accessed July 26, 2020

“20 Best POS Systems for Restaurants: Comparison of 2020 Solutions; FinancesOnline.” FinancesOnline Reviews for Business. https://financesonline.com/20-best-pos-systems-for-restaurants-comparison-of-solutions. Accessed July 26, 2020

“What is Commercial Property Insurance?” Nationwide. https://www.nationwide.com/lc/resources/small-business/articles/what-is-commercial-property-insurance#:~:text=Business%20property%20insurance%20is%20something,a%20fence%20or%20outdoor%20sign. Accessed July 26, 2020

“Does Business Insurance Cover Spoiled Food?” Allstate. Updated November 2019. https://www.allstate.com/tr/business-insurance/food-spoilage-coverage.aspx. Accessed July 26, 2020

“Liquor liability insurance for bars and other foodservice businesses.” Insureon. https://www.insureon.com/food-business-insurance/liquor-liability. Accessed July 26, 2020

McSweeney, R. (2020, January 17). “Everything You Need to Know About Restaurant Taxes.” Upserve. https://upserve.com/restaurant-insider/restaurant-taxes. Accessed July 27, 2020

How to Choose the Best Domain Name (14 Tips and Tools). Updated 2019, July 9. WPBeginner. https://www.wpbeginner.com/beginners-guide/tips-and-tools-to-pick-the-best-domain-for-your-blog. Accessed July 24, 2020.


CorpNet.com is a document filing service and CANNOT provide you with legal, tax, or financial advice. The information provided is for general educational and informational purposes only. It should not be considered legal, financial, or tax advice. Please consult a licensed attorney, accountant, or tax advisor to address your specific legal, tax, and accounting questions or concerns.