This article is a quick guide to starting a restaurant or a bar business in New York, that reviews the most important legal and bureaucratic aspects of this process. Once you have developed your concept, found the desired location and drafted your business plan, you can move on to dealing with the technicalities associated with restaurant business or similar in New York. This article can also be useful advice to start a restaurant or bar elsewhere in the United States.
Corporation or Limited Liability Company (LLC)
Forming a business entity under the American laws is the first step towards starting a restaurant business in New York and United States. Conducting a business as a legal entity allows its shareholders or members to protect their investment and keep it separate from their personal assets. Thus, the company’s creditors may only go after the company’s assets and the shareholders’ personal assets will be shielded against their claims or actions.
Forming an entity under the American laws is also essential to enter most of the commercial agreements required to get the business started, such as, for instance, lease agreements, assets purchase agreements and various insurance policies. The best suited legal entities to operate a restaurant or similar are the corporation and the limited liability company. For further information regarding the differences between these two types of entities read our article: U.S. Business entities. LLC vs. Corporation.
Employer Identification Number and Sales Tax Certificate
Once the company is formed, the first step is to obtain the Employer Identification Number (EIN) and the Sales Tax Certificate. The EIN, somehow similar to the european VAT number, allows the United States tax authority (Internal Revenue Service – IRS) to identify a business for tax payment purposes.
The Sales Tax Certificate is the permit to collect the sales tax from customers on certain transactions. The sales tax must be paid to the State approx. every four months. The sales tax only applies to certain types of purchase, including meals consumed in a restaurant.
Currently, in the state of New York the sales tax is approximately set at 9% of the transaction value. EIN and Sales Tax Certificate are a prerequisite to obtaining the majority of the administrative permits and licenses necessary to operate a restaurant in the United States, including food establishment permits and liquor licenses.
Location & Commercial Lease
If you are planning on starting a brand new restaurant in New York or in the rest of the United States, it is highly recommended to hire a real estate broker specialized in commercial spaces for lease. The broker will select a wide range of options in line with your needs and budget. Once the right location has been found and an offer has been placed, the landlord will perform the due diligence on the financial standing of the prospective tenant, as well as on the tenant’s business experience in the food and hospitality industry.
A landlord, indeed, will not be inclined to start a long-term business relationship with a tenant who doesn’t show sufficient financial standings and experience in this field. Commercial lease agreements in the United States, and especially in New York, are lengthy documents (approx. 60 to 100 pages including attachments) containing lots of technicalities that require the attention of a specialized attorney. Lease agreements are always subject to intense negotiations before the parties can close the deal. For more details on this topic, see our post Affitti Commerciali negli Stati Uniti.
Purchasing an Existing Business:
Another option is to purchase an existing restaurant, as opposed to building it from scratch. First thing is to determine whether your company is allowed to take over the lease agreement in place between the landlord and the legal entity from which the business will be purchased. Assigning the lease agreement to a new tenant is always subject to landlord’s prior approval.
If the prospective tenant does not show adequate financial standing or sufficient experience in the hospitality industry, the landlord will most likely disapprove the assignment. If the landlord’s consent to the assignment is obtained, the current tenant and the prospective one may move forward with the sale of the business: the most commonly used legal instrument to achieve this result is the Asset Purchase Agreement, a contract whereby the buyer only purchases the assets, but not the liabilities, of the business up for sale.
Restructuring the Premises
In most cases, some construction and remodeling activities will be required before opening the premises for business. Hiring an architect at this stage is crucial. The architect will design the premises according to your specifications and will submit the renovation plans to the Department of Building and other city departments for approval. Once this step is completed, the General Contractor will take care of the actual build-out of the space.
Like everywhere else in the world, the relationship between the business owner and the General Contractor is never an easy one. Therefore, it is of the utmost importance that this relationship be regulated by a written contract. The most commonly used version of the agreement between the business owner and the General Contractor in the United States is provided by The American Institute of Architects (AIA). The owner should protect its own interests including in the agreement a liquidate damage clause in the event the delivery of the space ready for business gets postponed as a consequence of delays imputable to the General Contractor. Such provision allows the business owner to get a monetary compensation that will offset the losses resulting from a delayed opening.
Food Service Establishment Permit
Before opening your restaurant to the public, a Food Service Establishment Permit is required. Such permit is issued by the Department of Health (DoH) of the city of New York. Initially, the DoH will conduct a preliminary inspection of the premises, in which any violations of the food safety regulations will be reported and corrected at no charge for the owner. At this point, the Food Service Establishment Permit will be issued and the food may be served at the premises.
Later on, without any prior notice, the DoH will conduct a new inspection in order to assign a “grade” to the restaurant based on its hygienic conditions and compliance with food safety regulations. Grades range from the letter “A” (perfectly in compliance with law) to the letter “C” (which means that one or more violations to the said rules have been found). The grade must be displayed on the storefront for the customers to see it. The DoH conducts periodic inspections, generally on an annual basis, in order to confirm or change the grade previously assigned.
The DoH requires that at least one employee in possession of the Food Protection Certificate be attending the restaurant operations at all times. A good rule of thumb, for obvious reasons, is to have at least two or three employees in possession of such certification.
NYC Liquor License
Obtaining a permit to sell alcohol (commonly referred to as liquor license) in the state of New York is a quite complex and time-consuming process. The authority in charge to issue new liquor licenses in New York is the New York State Liquor Authority (NYSLA) The ABC Law (Alcohol Beverage Control Law) governs the liquor license process and sets forth the general policies of the State of New York with respect to the sale of alcohol. The first step toward obtaining a liquor license for your restaurant or bar in New York is, in most cases, to appear before the local Community Board, which will review your application and issue a non-binding opinion of denial or approval to be later submitted to the NYSLA for the final decision. Community Boards in New York City may be more or less inclined to issue a favorable recommendation depending on the area of the city in which the restaurant or bar is set to operate.
In the State of New York, unlike other states, the number of liquor licenses that may be issued is not contingent upon the number of people residing in a given area, instead the matter is regulated by another set of rules, such as the 500 Foot Rule, according to which, typically, no more than three on-premise full liquor licenses (those that allow to sell spirits in addition to beer & wine) are permitted within 500 feet of each other. The restriction dictated by the 500 Foot Rule, however, is not absolute and may be overcome by showing, at a special hearing referred to as the 500 foot hearing, a specific public interest that may allow more than 3 premises in possession of a full liquor license to coexist within 500 feet of each other.
Being represented by a liquor license attorney throughout this entire process can make the difference between the approval and the rejection of your application. For further details on liquor license application please read through our articles: New York Liquor License FAQs – Part 1 and New York Liquor License FAQs – Part 2.
You can enter the United States on a ESTA or on a B-1 visa to carry out the activities required prior to the starting your restaurant business, such as researching the location for your restaurant, attending meetings with brokers, attorneys and other professionals, negotiating and executing commercial agreements. However, if your intention later on is to move to the United States and work in your restaurant, a non immigrant visa such as the E-2 visa will be required.
This visa may be issued to those who make a substantial investment in a commercial enterprise in the United States. Also, the E-2 visa may be granted to citizens of those countries, such as Italy, that maintain specific commercial treaties with the United States. The investment made in the American commercial enterprise must be “substantial”. It should also be proportionate and sufficient to support the type of business that you are willing to conduct.
While there is no minimum investment threshold, it’s unlikely that an E-2 visa application will be approved unless the investment is equal to or in excess of $80,000 – $100,000. Beneficiaries of the E-2 visa can be both the investors and their employees, provided the employees have the same nationality as the investor and are hired to cover executive or managerial positions.
The E-2 visa has a duration of 5 years, but can be extended without limitations as long as the initial conditions continue to exist. The spouse and minor children may accompany the E-2 visa holder and reside legally in the United States. The spouse may be authorized to work wherever he / she wishes, while the children may only attend school. For more information regarding the E-2 visa and other visas available to reside and work legally in the US, please read our article Immigration to USA. E-1 Visa and E-2 Visa.
Hiring Employees in the United States
The employment relationship in the United States is strictly “at will”. This means that the law allows the employer to discharge an employee (and, similarly, an employee to resign) without cause or prior notice. As a result, hiring and discharging restaurant staff in New York and in the United States is a relatively simple operation. As it’s equally simple for employees to resign without notice, having replacement staff always ready when needed is essential to maintain an unchanged level of workforce.
For 2019 the minimum hourly basic pay of a waiter in New York City is set at $14.50, of which $4.50 may come from tips. Overtime work must be paid 1.5 times the basic hourly rate excluding tips. Tipping does not constitute a legal obligation for the customers, but restaurant owners and employees typically expect the customers to tip 15-20% on the price of the meal.
Registering Your Trademark
Before developing the trademark that will identify your restaurant business in the United States, it’s highly recommended to conduct a preliminary research for trademark clearance purposes to prevent conflicts and confusion with other existing similar marks in the near future. In the United States it’s absolutely common, even for small to medium businesses, to protect their own trademarks filing an application for registration with the United States Patent and Trademark Office (USPTO).
Registering a trademark is not strictly required in order to obtain legal protection against third party infringements (a trademark in the United States is protected by the mere fact of using it in commerce before anyone else does) but it is extremely recommended to enjoy the extended legal protection afforded by the registration with the USPTO. For a general overview of the trademark registration process in the United States see our article on the topic: How to Register a Trademark in the United States.
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Startups Funding and Capital Raising are two concepts closely related.
Raising capital is crucial to the life of startup companies, that often make the choice to be unprofitable at inception and, therefore, crave regular injections of cash to survive and continue to grow. These companies, in fact, strategically choose not to focus on profitability, instead they prefer to use their resources to grow the business as quickly as possible, to attack large portions of the relevant market.
Seed round. Seed financing is the first round of startup financing, typically known as a seed round, which generally occurs when the product is at the idea stage, or a very first version of such product has been delivered. Seed round investors are typically friends & family and angel investors. The legal financing instruments for this round are convertible notes and simple agreements for future equity (SAFEs).
Convertible Promissory Notes. Commonly referred to as Convertible Notes, CPN are structured as regular debt instruments, except that they are subject to conversion into preferred equity should a “conversion event” occur at some point in the future. Basically, investors rather than getting repaid with principal plus interest at the note maturity date, may choose to receive equity of the company instead. Most important events that trigger conversion into equity are:
- A subsequent financing round (next equity financing conversion);
- Sale of the company or its asset (corporate transaction conversion);
- Note maturity date (maturity conversion). The most attractive feature of the CPN is that the noteholders may receive equity at a price lower than the price paid in the next investment round, based on a discount rate or a valuation cap. In simple words, the lower conversion price works as a reward for investors who took the risk of financing the company at its early stages.
SAFEs. Simple Agreements for Future Equity are debt instruments featuring, a structure identical to the CPNs except that:
- there is no maturity date, therefore the SAFE will remain outstanding until a conversion event occurs;
- interest will not accrue. Resorting to SAFEs rather than CPNs, startups will not bear the risk of repaying a promissory note, if the note maturity date occurs before the next investment round, leaving the company without funds.
Series A Financing.
When startups succeed in proving that their product is marketable, what comes next is raising a more substantial round of capital. This round often occurs when companies enter the building phase of the product and Series A investors typically are represented by venture capital funds that purchase convertible preferred stock. Terms and documents of a Series A round are largely standardized so that the process may move forward quickly and funds don’t leave the company in the form of lawyers’ fees.
Most relevant Series A terms are as follows:
- Liquidation Preference: the Series A holders must first receive a liquidation preference equal to the original purchase price of their preferred shares, before any proceeds from a sale or liquidation of the company can be distributed to the common stock holders.
- Dividends: typically, common stock cannot be paid a dividend unless the preferred stock receives the same amount on a per share basis.
- Conversion: Shares of Series A Preferred Stock are convertible into shares of common stock on a 1:1 basis (subject to adjustment in case of certain dilutive events) at the holder’s option at any time. Conversion is generally automatic in case of IPO.
- Price-Based Anti-Dilution Protection: right to downward adjustment to the purchase price of the preferred shares if the company later issues common or preferred equity at a price below the Series A price to give the Series A investors more than one common share for each share of Series A preferred stock they hold, if and when the Series A stock converts to common.
- Protective Provisions: Series A investors may be entitled to veto rights on crucial company actions, such as: (i) actions that adversely affect the rights, preferences, or privileges of the Series A holders; (ii) amendment of certificate of incorporation and bylaws; (iii) Issuing senior securities; (iv) Declaring or paying dividends; (v) Increasing or decreasing the size of the company’s board of directors.
- Board Matters: The lead investor is typically entitled to one seat on the board of directors.
- Registration Rights: demand, piggyback, and shelf registration rights.
- Financial Information and Inspection Rights: investors may be entitled to receive certain financial information regarding the company.
- Rights of First Offer: right to purchase new securities offered by the company, allowing investors to maintain their proportional ownership of the company.
- Rights of First Refusal: right to purchase the shares of common stockholders in the event that such stockholders are planning on selling their shares to a third party.
- Tag Along: Should (the company and) Series A holders fail to exercise their rights of first refusal in a certain proposed transfer, the Series A holders have the right to sell their preferred shares in proportion together with the common stockholders on the same terms.
- Drag-Along: smaller stockholders of the company may be forced to agree to a sale of their shares if the majority of the common stockholders and a majority of the Series A investors are willing to move forward with the sale.
Series B Financings and Subsequent Rounds
Through post- Series A rounds, startups continue to raise increasingly large amounts of capital focusing on fast growth. These ensuing rounds of financing are typically named by progressing through the alphabet (Series B, Series C, and so on).
The amounts raised in these rounds go from $5 million to $10 million in a Series B round to up to $100 million in a Series E. In these stages, investors are mostly represented by Venture Capital funds and sometimes corporate strategic investors, mutual funds and hedge funds.
Financing Instruments: also in these later rounds investors receive convertible preferred stock. After issuing Series A preferred stock, startups generally continue issuing same type of stock with different terms on top of the existing Series A documents by amending and restating them.