How To Start A Restaurant: A Step-by-Step Guide to Opening a Restaurant

Apr 8, 2022

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Beginning a restaurant may be a bit overwhelming. The steps in our guide will help you understand the basics to be aware of and what you can expect at every stage.

If you are a foodie and are looking to establish your own small-scale business, you have likely looked into ways to start an eatery. In the end, opening restaurants are among the most well-known methods of entrepreneurship within the United States. Based on the National Restaurant Association, restaurant employees comprise 10 percent of the United States workforce. Furthermore, sales in the restaurant industry are expected to hit $863 billion in 2019.

The problem is that opening a restaurant means entering a highly competitive industry. More than 1 million restaurants across the United States, and 60 percent go under within the initial year. How do you stand out and create something that lasts?

How To Start A Restuarant

In this article, we’ll help you learn how to start your restaurant without making common mistakes that plague the majority of newly-established restaurateurs.

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Step-By-Step Instructions For Beginning An Establishment

No matter what background or expertise you’ve got, no one will be able to fully help you start your first restaurant or start a business. And regardless of how many books you read or the amount you study, there are some things about running a restaurant that you will learn from your own experience. However, the tips below will aid you in avoiding the most frequent mistakes.

Step 1. Pick a niche

There’s a vast range of restaurants around the globe, and it requires a variety of different abilities to make sure they are running efficiently.

While you look around your world, What kind of food or service do you feel lacks? What is food aficionado needs not being met? Do you think your market could be better filled by opening a Pizza restaurant, launching the first food truck, or even opening an eatery?

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If this doesn’t narrow down your options sufficiently, you should look into the most popular trends.

Step 2. Create your business plan

Like how recipes offer you the steps to make the perfect dish, your restaurant’s business plan will be the recipe you’ll follow to ensure your restaurant’s success.

The essence of creating a business plan involves thinking about and responding to questions regarding the future restaurant you plan to open that require you to consider the market you’re serving and the sustainability of your plan, and the challenges you may not consider.

If you do it right, This process can assist you in clarifying the following steps to take when opening your establishment and give you the best chance of success.

Check out the 12 most essential questions you must ask in your new restaurant’s business planning process.

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  • What type of restaurant do you wish to operate? This is called the “elevator pitch,” which you’ll repeatedly repeat to family members, friends, customers, lenders, investors, etc.
  • Who are you catering to at your restaurant? This is known as your target market. It is the population that your restaurant’s goal is to cater to.
  • Which competitors are you competing with? It’s helpful to know the competition in your industry and what their restaurants are similar to and different from yours.
  • What is the location where your restaurant will be situated? The idea of a steak house that costs a lot within an area with a low income probably will not work.
  • What is your unique selling point? What differentiates your restaurant from other restaurants?
  • What will people do to find your restaurant? Do you promote your business via word-of-mouth, paid advertisements, social media, or other methods? We recommend using review applications such as Yelp, OpenTable, and Resy for customers to discover and evaluate your restaurant or make reservations online.
  • What kind of resources will your restaurant require? Make an effort now to record the recurring and one-time costs you’re likely to incur as part of the cost of operating a business, leaving no scratch unturned.
  • How can your restaurant earn profits? Your business model will determine how your restaurant can generate revenues, pay for costs, and ultimately make more than it pays for.
  • What time will it take for your restaurant’s business to turn profits? Please use a revenue forecast to figure out how long it’ll take to recover your initial investment, break-even, and operate a profitable business.
  • What do you refuse to sacrifice? What are the most important values for you, personally and in your company? What are your essential values? This will allow you to make crucial business decisions in the future.
  • What’s your plan for staffing? The head cook, your friends, and your family members will be your first port of call for intelligent, rugged, and reliable individuals. However, even if you have an excellent staff, you’ll need to educate them.
  • What’s your goal? Are you planning to build your restaurant to sell eventually, or are you trying to build a long-term, profitable business? Knowing where you’d like to go and when can help inform many about your decisions in business.

If you are planning to create a unique business name, then go ahead and register the “doing business under the name” (DBA) address with the state agency of your state to prevent the possibility of losing your idea for a name to another company.

After you have your DBA established, you’re ready to select the type of business entity to run your establishment. The kind you choose will determine how you file federal and state tax returns, the roles of the various team members, and how you’ll be held accountable should somebody file a legal lawsuit against your company.

Due to the long-term and possibly significant consequences of your business arrangement, it’s a good idea to talk to an attorney for business to assist you in making this decision. Below are the most commonly used entities for restaurateurs:

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Sole proprietorship

It is the simplest form of business structure. In this model, you own the company and are responsible for all obligations that arise from it.

Plan to operate a food truck, pop-up store, or any other tiny business that doesn’t involve fixed assets or employing any employees. A sole proprietorship could be the right choice for you. The best part is that it doesn’t require any formal step to establish the sole proprietorship.

Suppose you’ve got an inventive idea for a name for your business, and you can get it registered. In that case, your “doing business under the name of” document (from above) is all you require. If you’re going to operate in your name as an individual, you’ll be able to begin the business.

Partnership

This structure describes a single company with two or more people who are the owners.

There are several different partnership structures that you can select from, such as the general partnership, a restricted partnership, or a joint venture.

Most experienced entrepreneurs do not suggest partnerships as a company arrangement because they don’t provide the most protection against liability.

If you decide to opt for a partnership, make sure that the business partner you can work with over the long term. Make clear the conditions and expectations in writing at the outset, describing the obligations and roles of each partner.

C-Corporation

C-corporations are more complex business structures typically reserved for larger businesses or those in high-risk sectors that need some extra protection.

Most lawyers place restaurants into this high-risk category, and a C-corporation entity is highly advised. However, bear in mind that the formation of C-corporations requires an executive board and officers and is more complex in terms of accounting requirements for tax returns.

Therefore, consult with your lawyer; however, be aware of the possibility of the procedure being somewhat complicated.

S-Corporation

The structure is very similar to a C-corporation that is a regular one. S-Corporations stand out as they are taxed at the individual level of the business owner instead of being taxed as a corporate entity.

If you believe you might require the structure of a company. Still, if you don’t want to deal with complex dividend filings, an S-Corp could be an excellent alternative option for your needs.

Limited Liability Company (LLC)

With the protections for liability of a company and the flexibility and tax efficiency of sole proprietorship or partnership, The limited liability company (LLC) is a “best option of both” business structure that has seen an increase in popularity in recent years.

Entrepreneurs who choose an LLC structure may choose between a single-officer LLC, a partnership LLC or a limited liability corporation.

Step 4. Find an identification tax code for the restaurant you are operating

Also called the employer identification number (EIN in short), This number is used to help the IRS keep on track of your business’s activities for tax purposes.

Imagine it as the social security number of your company.

If you intend to keep your employees (think waiters, hosts, hostesses, cooks, and dishwashers), particularly if your company is incorporated as a partnership or corporation, you’ll need this number to keep things moving upwards.

You can apply online on the IRS website to get the employer I.D. number.

Step 5. Register your restaurant to pay local and state taxes.

Along with federal taxes on business, Most U.S. states and territories will require tax on employment and income for your company. Certain conditions may have additional fiscal requirements like mandatory workers’ compensation by the state or unemployment insurance.

Registration Requirements the filing process differs according to the state you live in. So, make sure you review the information on business taxes specific to the state where you reside.

Step 6. Get permits, licenses, and insurance for your establishment.

The FDA changes its Food Code every four years. The specifics of what is mandatory, highly encouraged, and only optional will differ between states and even between counties.

You can look through the 600+ pages published by the FDA. We would suggest starting by locating the foodservice code regulations of your state’s department. Here are a few of the critical points you can expect to see to bring your business up to speed within your state. This guide is helpful; however, it isn’t comprehensive. Consult the local health department to ensure all your requirements are covered.

It’s recommended to keep an organized calendar that includes reminders for your payment due and renewal dates.

Food licenses

The most crucial aspect of staying fully compliant is acquiring licenses for the health and food code. These permits prove that you’re safe in handling food items and storing and serving food items. And don’t think you can’t have a food cart, or even a stand at a festival will take the shackles off you. They’ve thought of them as well.

Learn our complete guide to obtaining a liquor license in each state. However, in this list with its own unique rules and permits will be the serving of alcohol. This does not only include serving alcohol safely but also training for dealing with clients who may have overindulged.

Health department permits

The health department has plenty to say about what’s safe in the establishments you intend to store, prepare, or serve food. The establishment you choose to use will have to be examined for safety in operation and food security.

Think of maximum occupancy, fire dangers, ventilation, types of food surfaces, Sink placement, restroom regulations, etc.

Restaurant insurance

Even with all the required permits and licenses, You still have to secure additional security measures. It is vital to research the specific requirements for business insurance for restaurants.

The requirements vary based on your location and how you’re funded, but at a minimum, you should think about these:

  • Home insurance
  • General insurance
  • Liquor liability
  • Auto liability
  • Workers compensation insurance
  • Unemployment insurance
  • Life insurance
  • Fire insurance
  • Business loss
  • Food contamination

Americans with Disabilities Act conformity

In 1992 The Department of Justice passed the Americans with Disabilities Act so that employees and consumers who have disabilities would not be discriminated against in public places of accommodation.

The full details for the ADA are extensive. Still, you could use this U.S. Small Business Administration guide to learn more about what’s required.

Once you have gotten past all angles measurement, legalese, and angles, It boils down to making accommodations to ensure that disabled people can safely park their cars, get into the restaurant, take orders for food, and sit at tables.

Step 7. Create accounting documents

The running of a restaurant requires lots of paperwork. You’ll need accounting records to complete your tax returns and apply for financing for your business and internal monitoring of your income, expenses, and profits.

At a minimum, each restaurant proprietor should keep the following three financial documents.

Balance sheet

Maintaining a “balanced” balance sheet, which shows the total assets equal to liabilities and equity, is the premise of bookkeeping basics. The balance sheet accounts for your restaurant’s financial situation at any given point. It includes the number of assets and the liabilities and equity that your business holds at any given moment and can be used to determine your company’s value.

Income statement

Sometimes, it is referred to as a profit loss statement. The income statement summarizes the business’s revenues and expenses over an entire year. It allows you to determine your net loss or profit for the current year. Achieving a precise income statement is crucial for assessing the profitability of your business over time.

Statement of cash flow

Cash on hand to pay for expenses can determine financial health. Indeed, this concern is so critical that there’s an accounting document designed explicitly for monitoring cash flow.

Your cash flow statement shows the flow of revenue and the outflows of expenses due to every aspect of your restaurant’s activities over an exact timeframe, typically either a month or a quarter. Outflow results from buying ingredients, payroll, and rent payments, among other overhead costs. The inflow is derived from serving drinks and food to customers who pay.

Think about hiring an accountant or bookkeeper

Suppose you’re feeling a little overwhelmed by these accounting procedures. In that case, We suggest asking to find an accountant certified by the public accounting profession. It’s crucial to choose one whose style and personality match your own, who is ready to help you whenever necessary, and who can deal with financial issues you’re unfamiliar with. Employing a CPA who is familiar with the restaurant business will assist you in understanding local laws so that you don’t face any problems concerning servers’ minimum wages and tips as income or overtime payments for employees.

Step 8. Make sure you have the best equipment for your restaurant

Particularly considering all the moving parts of a restaurant handling the accounting records above manually can be too much in a short time.

Also, timesheets for employees, schedules of employees, processing of payments as well as payroll processing. All the other responsibilities that keep your restaurant running!

There are some great tools for restaurant accountants. Alternatives and other tools that will take the stress out of your bookkeeping and create these accounting documents in an automated way.

Restaurant POS system

One of the aspects that business owners frequently overlook when researching ways to start a restaurant is the need for a restaurant POS. The restaurant POS system comprises software and hardware that lets you perform various important tasks, such as front-of-house administration, payment processing orders, and tip reconciliation. The majority of POS systems also generate valuable reports that help you improve the efficiency of your operation.

Here are a few of our most-loved POS systems depending on the kind of restaurant you run:

  • Square For Restaurants The best restaurant POS system to open a new restaurant.
  • Clover POS: Best POS system for quick-service restaurants.
  • Lightspeed Restaurant Point of Sale: The most efficient system of POS for medium and small-sized eateries.
  • TouchBistro POS: Best POS system for full-service restaurants.
  • Toast Point of Sale: The most effective Restaurant POS system on Android.
  • Loyverse POS: The best Free Restaurant POS Software.

Step 9. Be sure to keep up with your restaurant’s tax obligations

Alongside getting your bookkeeping up to date, understanding and meeting tax obligations should be a primary consideration for the financial management that your business is operating. Your federal and state tax obligations are severe if you don’t submit. The company could be shut down and possibly even be charged with a crime.

This means that even though handling the IRS isn’t easy; this isn’t something that you should ignore.

Let’s take a look at the principal tax obligations of a business that you must keep track of:

Income tax

All companies must file annual tax returns and make payments according to their revenue.

The tax form you will use to pay income tax is dependent on the business structure you have, such as sole proprietorship or partnership, corporation S-corporation, or a limited liability corporation (LLC).

Self-employment tax

People who are self-employed (including entrepreneurs who own small businesses) must contribute social security and Medicare taxes as self-employment tax. This tax is comparable to the taxes taken from the wages of the majority of salaried employees.

Tax estimate

Self-employment and income taxes are considered “pay as you pay as you go” taxes. You’ll have to submit quarterly reports that estimate the amount of tax you owe in these categories and pay them per the amount.

Please click here to download forms and further information about how to make your quarterly estimated tax payments.

Employment taxes

As you’ll likely employ employees in the restaurant you run, you will probably have additional tax obligations relating to these employees, including Social Security and Medicare taxes, Federal income tax withholdings, and the unemployment tax.

Find out the specific IRS details regarding filing tax returns for employees for your company.

Step 10. Make sure you have enough money to open your restaurant

Suppose you aren’t wealthy enough to be independent and have a lot of money. In that case, you’ll probably need money from someone to start an establishment.

Entrepreneurs finance their business through various methods; however, the most popular way is to get a business loan. The rapid growth of the alternative lending market has led to a broad range of loan options to cater to the needs of entrepreneurs, each having various costs, payment arrangements, and processes for application.

Let’s look at the options for business loans for restaurateurs.

Term loans

Rate. Perhaps the first thing you picture when you think of term loans for business. They provide a fixed repayment period and a predetermined number of payments, and an interest rate that is either variable or fixed.

Based on your company’s requirements, credit score, and many other aspects, there is a vast selection of term loans that are available to a lot of small business owners, both from traditional banks as well as alternative lenders that are not banks and with durations ranging from one year with a daily payment to five-year terms that include monthly installments, and between.

SBA loans

Due to the high risk involved in small business loans, commercial lenders have not been willing to lend money to small-scale business owners, particularly those starting new ventures in the restaurant industry.

To solve the issue to this issue, as a solution, the Small Business Administration began guaranteeing as high as 80 percent of the principal amount of loans for short-term loans made by participating lending institutions. It could be an attractive alternative if you already have skills in food. (Otherwise, chances are you won’t be considered. )

The SBA provides various loan options, including those for restaurateurs. If you intend to take the SBA loan as your primary source of financing to begin your restaurant, you’ll have to enter the process with all your ducks in order. Make a strong business plan that demonstrates what makes your business idea, and make sure you receive 20% to 30% of your loan’s amount in cash or obtain a mortgage on your house.

Remember that, while the stamp of approval from the SBA might make lenders more inclined to take applicants who do not meet their strict lending criteria, However, the process of applying for an SBA loan is still lengthy documentation. The procedure can take months to complete.

Equipment financing

Suppose you’re in the market for money to finance a significant equipment purchase (like points of sale technologies, commercial kitchen appliances, furniture, or flatware) to start your own business. In that case, Restaurant equipment financing could be the perfect option.

This product for financing works precisely like an auto loan, and the amount you can borrow is based on the amount and kind of equipment you’re looking to purchase.

The equipment acts as collateral for the loan; you will not be required to offer additional collateral to secure your loan.

Equipment financing terms are generally based on a fixed interest rate of 8%- 30 percent and a fixed length of time, so your monthly payments will remain identical from month to month.

Short-term loans

For companies with less urgent financing requirements, the short-term loan can be a lifesaver. They function similarly to traditional term loans but can cover amounts in the $2,500- $250,000 range, with terms between three and 18 months.

With rates as low as 14%, short-term lending providers can often get cash in within two days. This allows you to pay rent, cover the cost of payroll or food vendor payments, or cover other immediate expenses, even when cash is scarce.

Line of Credit

The most flexible business financing is the commercial credit line offers the capital you need to satisfy a range of business requirements.

Once it is established, you can use the credit line the same way you would with a credit card to obtain additional working capital, purchase inventory, manage cash flow fluctuations during the season, pay off other obligations, or cover nearly any other business requirement.

If you are planning to apply for a business loan soon, be sure you’re regularly looking over your personal and company credit reports and doing everything you can to increase your score on credit.

Together with the annual earnings and time in business and your average balance in the bank, Your personal and business score on credit is the most crucial aspect that determines the likelihood of you being able to get an unsecured business loan.

How much will it cost to start the restaurant?

After you’ve learned about the financing options available to you, You’re probably thinking about the financing you’ll require.

The restaurant’s cost is mainly contingent on the kind of restaurant you’d like open, the style of service and decor, location, menus, etc. A recent survey conducted by RestaurantOwner.com offered some insights into the costs entrepreneurs may have to shell out.

Based on a study of 350 restaurant owners, A small-sized restaurant could be as high as $175,500 for the initial costs. A mid-sized restaurant will cost about $375,500. The price of a larger restaurant can be up to $750,000.

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