Opening a restaurant: legal considerations and requirements

Opening a Restaurant: How the Law Impacts Small Business

This paper discusses opening a restaurant in two locations: Clarksville, Indiana, and Louisville, Kentucky. There are a myriad of concerns involved in opening a small business. Opening a small business requires a tremendous amount of preparation, and failure to prepare can often equate to failure in the business world. There are practical things that small business owners need to do to open a business, and the first thing is to honestly assess whether or not one has the wherewithal to be a small business owner. Once that determination has been made, it is important to write a business plan. This helps flesh out ideas for the business and determines whether or not a business is viable. For a restaurant, viability is based on a number of factors including the population of the local areas, restaurant experience, market saturation, demand, economic factors, and the legal requirements of opening and maintaining a restaurant.

One of the concerns with viability is the ease of establishing and maintaining a business. The more difficult a business is to establish and maintain, the lower the profit margin and the greater the likelihood of failure. Restaurants are actually one of the most highly regulated of all small businesses, because food service comes with a high degree of health and safety responsibility for customers. Furthermore, because restaurants are part of the hospitality industry, even small business owners must be very aware of civil rights legislation impacting hospitality providers. Therefore, small restaurant owners must be very aware of laws in order to remain in business. In addition, they must be aware that they are impacted by laws at virtually every level of the statutory process. Federal laws legislate civil rights, federal income tax obligations, and some worker safety issues, state laws cover state sales and income tax and the sale of alcoholic beverages, and local laws cover important issues like whether or not a building can be used as a restaurant.

Federal Requirements

Like all employers in the United States, restaurants are responsible for meeting federal legal requirements. These federal legal requirements may seem onerous, but the system for obtaining them is actually very streamlined, so that even small businesses can simply go online to IRS.gov and obtain the appropriate paperwork. Restaurants need to get taxpayer identification numbers, so that they can pay income taxes as a business, and employer identification numbers in order to pay income taxes for their employees. The Employer Identification Number (EIN) form can be obtained from the U.S. Internal Revenue Service (IRS), and is known as the Employer Tax ID and Form SS-4.

In addition to meeting their own tax requirements, restaurants must ensure that all of their employees are also in compliance with federal law. This does not require extraordinary efforts on the part of employers, who are allowed to accept evidence at face value, but they must obtain some proof of identification. First, employers must verify that employees are eligible to work in the United States, which is accomplished with an I-9 form from the IRS.

In addition to having an employee complete the I-9 form, the employer must get a copy of the employee's social security card or other paperwork indicating an ability to work in the United States and an identifying number for income tax purposes. Next employers have to worry about complying with applicable federal income tax laws. This can be accomplished by having employees fill out IRS forms w-2 and w-4, and saving the appropriate amount of income-tax from the employee's paychecks. For a general overview of federal withholding requirements, one may look at 26 U.S.C.S. § 3402.

A further complicating factor is that there are numerous federal laws that speak to the rights of employees in business. However, these laws may or may not apply in the small business environment, so that it is impossible to determine whether or not they would be applicable without knowing the number of projected employees at the restaurant, whether the restaurants would be part of a franchise or wholly independent of other restaurants, how close the restaurant would be located to other restaurants in the chain, and other factors that can help determine the applicability of federal statutes. That is because, while employees have a number of rights under federal laws, many of those laws do not apply to small businesses. For example, small businesses are generally exempt from coverage under discrimination laws, at least as far as oversight by the Equal Employment Opportunity Commission (EEOC), because small businesses may not have 15 employees. While it would be important to strive to respect the values reflected in anti-discrimination legislation, whether or not the business would be covered by these laws does depend on the number of employees.

Without knowing the particulars of the restaurant, it would be impossible to detail all of the federal laws that might impact its opening and operation. However, there are a handful of federal laws that impact many working environments. One of these laws is Title VII of the Civil Rights Act of 1964, 42 U.S.C.S. § 2000e, which prohibits discrimination based on race, gender, color, sex, or national origin.

The Equal Pay Act of 1963, 29 U.S.C.S. § 206(d) prohibits paying one gender more than another for the same pay.

The Age Discrimination in Employment Act of 1967 prohibits discrimination against people over the age of 40.

The Americans with Disabilities Act prohibits employment discrimination based on disabilities and requires employers to make reasonable accommodations for employees with disabilities.

While other laws may apply to employment discrimination, these are the ones that a small business owner is most likely to encounter. Furthermore, employers will likely encounter family and medical leave issues, and should be familiar with the Family and Medical Leave Act, particularly as it relates to issues of pregnancy and childbirth.

State

Once a business has satisfied its obligations under Federal law, it must look at its obligations under state law. In addition to complying with federal tax requirements, a small business must also comply with state tax requirements. This business is going to be operated in two different states. Therefore, this paper must examine the legal requirements in both Indiana and Kentucky. This business is going to be a sole proprietorship. How a business is held is critical, because if a business is established as a form of partnership or a corporation, those entities must be registered in the applicable state. Determining which state to choose for incorporation is a complex decision and one might even decide to choose a state other than Indiana or Kentucky because of the tax and legal benefits of incorporating in another state. If one anticipates opening a large number of restaurants in a wide variety of locations, then incorporation in a favorable state would be a critical step prior to opening the restaurants. While that issue is not applicable in the current scenario, it is important for any small business owner to understand that there are a wide variety of benefits associated with incorporation, and that those benefits are determined by state of incorporation.

While these restaurants will be operated as sole proprietorships, one will still need to ensure that I can use a business name for the restaurants, because many states prohibit the use of an unregistered business name, which frequently requires filing a Doing Business as (DBA). Obtaining a DBA is done on the state level. Additional state laws apply to the operation of a restaurant as well. For example, restaurants must comply with state tax and employment laws. Restaurants also generally have to pay sales tax, as well as special taxes on the sale of food and alcoholic beverages. Because these laws vary by state, they will be addressed on a state-by-state level.

Indiana

In Indiana a restaurant needs to comply with the following state laws: tax registration, business licenses, incorporation filing, doing business as, employer requirements, withholding taxes, new hire reporting, insurance requirements, and displaying the appropriate workplace posters.

There is some leeway in the order of accomplishing various requirements, but some things must be done before others. Because of that, the first thing that a small business owner in the state of Indiana should do is file a DBA. The DBA gives the business owner the right to establish insurance, bank accounts, and other business-related issues in the business's name; therefore, establishing the DBA at the beginning will streamline the process. In Clarksville, Indiana, one would file this at the County Recorder's Office in Clark County, which would be the primary place of business within Indiana. The requirements for a DBA are found in Ind. Code § 23-15-1.

One would also need to learn the requirements for the Indiana sales tax and determine whether or not food and beverage establishments in Indian pay sales tax. They do, and the requirements for the sales tax in Indiana can be found in Ind. Code Ann. § 45 art. 2.2. In addition to a sales tax, some restaurants in Indiana must pay additional taxes on food and beverage sales. Those additional taxes are determined at the local level, but Clark County does not impose those additional taxes. Indiana is also one of the states that impose state income taxes; therefore an employer in Indiana must prepare withholding information for its employees. The general requirements of state income tax withholding in Indiana may be found in Ind. Code § 6-3-2.

Finally, in Indiana, business licenses and permits are a matter of local and county law, and those requirements will be examined in the local law section.

Labor and wage issues are of major concern to employers and are covered by a wide range of laws, ranging from occupational safety issues to whether or not an employer can loan an employee money. An employer must understand all of these laws in order to be in compliance with state labor laws. Indiana maintains a state minimum wage, which is governed by Ind. Code § 22-2-2.

How wages may be paid is governed by Ind. Code § 22-2-4.

How frequently wages must be paid is governed by Ind. Code § 22-2-5.

If any deductions are to be made from employee paychecks, those are governed by Ind. Code § 22-2-6.

Presumably, a restaurant in Indiana would be required to have worker's compensation insurance, though worker's compensation statutes are complex and depend on a variety of different issues. To determine whether or not a restaurant would need to maintain worker's compensation insurance for its employees, and its liabilities if not insured, one should examine the entirety of Ind. Code § 22-3.

Kentucky

In Kentucky, a restaurants needs to comply with the following state laws: tax registration, business licenses, incorporation filing, doing business as, employer requirements, withholding taxes, new hire reporting, insurance requirements, and displaying the appropriate workplace posters.

The first thing that one should do is obtain a DBA in Kentucky with the Secretary of State, as required under KY. Rev. Stat. Ann. § 365.

One would also need to learn the requirements for the Kentucky sales tax and determine whether or not food and beverage establishments in Indian pay sales tax. Information regarding sales taxes in Kentucky is contained in KY. Rev. Stat. § 139.00, and includes information on how to obtain a permit to engage in a retail business within the state.

Like Indiana, Kentucky is also one of the states that impose state income taxes; therefore an employer in Indiana must prepare withholding information for its employees. The general requirements of state income tax withholding in Kentucky may be found in Ky. Rev. Stat. Ann. § 141.

Like Indiana, Kentucky has a wide variety of laws governing working conditions and wages. An employer must understand all of these laws in order to be in compliance with state labor laws. Ky. Rev. Stat. Ann. § 337 covers wages and hours.

Ky. Rev. Stat. Ann. § 338 covers working conditions impacting safety and health for workers.

Ky. Rev. Stat. Ann. § 341 covers an employer's responsibilities under the state unemployment compensation insurance program.

Ky. Rev. Stat. Ann. § 342 covers workers' compensation and employer liability for worker injuries.

Ky. Rev. Stat. Ann. § 344 covers Kentucky's civil rights legislation.

Kentucky's alcoholic beverage code is somewhat complex, but allows for state administration of the right to sell alcohol in certain areas. Details of that code may be found in Ky. Rev. Stat. Ann. § 243.

Kentucky has a more centralized system of permits than Indiana. For example, in Kentucky there is a state fire marshal, and while his duties may be delegated to other officials, he is in charge of inspecting commercial properties.

Building safety requirements are outlined in Ky. Rev. Stat. Ann. § 227.300.

While this is not an exhaustive list of state laws and business permits with which a restaurant owner in Kentucky may need to comply, it does give a good overview of the nature and scope of the laws governing business in the state.

Local

Local laws can have a huge impact on small business administration. While all businesses need to comply with state and federal laws, businesses are rarely shut down for failing to comply with those laws. Instead, the real threat to small-business administration is failure to comply with local laws. The local laws that may impact a restaurant include: business licenses, tax permits, building permits, health permits, occupational permits, signage permits, alarm permits, and zoning permits. Prior to attaining these permits, it would be critical for a restaurant owner to speak with the appropriate official about the requirements, which may or may not be officially codified. For example, zoning requirements may seem relatively strict on paper, but an area may be very willing to issue zoning variances; this would be impossible to detect just by looking at the written laws. Therefore, prior to opening a restaurant, one should speak with the local officials in charge of each area, submit plans for preapproval when possible, and attempt to utilize the same official throughout the process. Moreover, one should expect to encounter multiple lower level officials because of the high number of permits. While it may be inconvenient, all of these small permits are necessary in order for a business to operate on a local level. In both Indiana and Kentucky, these local permits can be obtained on a county level.

Clark County, Indiana

In addition to the general permits that one must have to operate a restaurant in both Indiana and Kentucky, the local government is in charge of alcoholic beverage sales at a restaurant. Because Clarksville has more than 20,000 inhabitants and the restaurant would be within corporate limits, issuance of the appropriate alcoholic beverage permit would be governed by Ind. Code § 7.1-3-20-10.

Health regulations for restaurants are governed by state law, but administered at the local level. The requirements for health regulations are found in Ind. Code § 16-42-5, and local health departments may not impose greater restrictions than those found in state law.

Louisville, Kentucky

While Kentucky has less of a localized system than Indiana, it would be erroneous to assume that municipalities and counties are unable to impose their own requirements for business. For example, in Kentucky, local governments are specifically given the right to adopt safety standards that are more stringent than those imposed on the state level.

If the restaurant needs any electrical work, the owner must first obtain a permit and then have that electrical work inspected, as provided in Ky. Rev. Stat. Ann. § 227.480.

Moreover, while state inspectors are in nominally in charge of issues like fire safety inspections and building code inspections, they can and do have local individuals take responsibility for those inspections. Going to the municipal government with any questions about permits, licensing, and zoning is a critical step for small business owners in Louisville.

Applicability of Article 2 of the Uniform Commercial Code

Article 2 of the Uniform Commercial Code generally covers the sales of items.

In Indiana, Article 2 of the Uniform Commercial Code is codified at Ind. Code § 26-1-2.

In Kentucky, Article 2 of the Uniform Commercial Code is codified at Ky. Rev. Stat. Ann. § 355.02.

For all practical purposes, the texts of both articles have the same application in both states, and reflect the essence of the model Uniform Commercial Code (UCC). Article 2 of the UCC covers the sale of goods, not the sale of services. Restaurant transactions are generally viewed as a hybrid of a sale of services and a sale of goods. Therefore, the actual food sold in the restaurant would be covered by the UCC, but issues arising with the wait staff or other methods of service would not generally be covered by the UCC. Therefore, by offering food for sale, a restaurant is going to be held to the same standards as other merchants. For example, a restaurant would get in trouble for improperly labeling food, for example if it sold sirloin steak as ribeye steak, it would run afoul of the provisions of the UCC, even if there was nothing wrong with the steak from a health or safety viewpoint. Moreover, by offering food for sale, a merchant is warranting its fitness for consumption. That issue becomes more difficult because of how federal, state, and local food safety laws impact food sales, but the UCC would presumably cover a dispute between a disgruntled customer and a restaurant. However, the most well-known consumer lawsuits against restaurants have not been based in commercial law, but in tort law.