You're Opening A Restaurant In NY and Need to Talk to a Lawyer...

Part 1: Priorities and Your Restaurant Business

So you want to start up a restaurant--you have a place picked out, but you are also wise.  You know you can't go it alone.  You have decided to hire an attorney to guide you through all of the potential pitfalls of restaurant management in New York.  What should you discuss with a lawyer?

Choose Your Business Entity

It seems that New York restaurants more often choose to become an LLC.  But there are very good reasons for forming an S-Corporation, instead.  For instance, if you do not need the flexibility an LLC offers, or you don't need investors in order to capitalize, you may be pleased by the relatively inexpensive and straightforward nature of an S-Corp. Keep in mind that owners of an S-Corporation MUST be individuals and not other LLCs.  If you plan to pursue corporate investors that own part of the company as an entity, or plan to spin off different elements of the restaurant project into discreet companies (e.g. you plan to be the next Emeril, and want to have a products line, or multiple franchises), an LLC is for you.  You can nest one LLC in another, so the Restaurant Management Company LLC can oversee the production of the Food Products LLC and the operation of the Restaurant Location LLC.

Related: Should Your Startup Be an S Corp or LLC?

Capitalizing and/or Crowdfunding

Should you offer shares in the company or should you try to get people to "back" you in exchange for rewards (such as a recipe book or vouchers for free meals)? Or both? A traditional offering can be structured by your lawyer in a way that suits the nature of your investment.  For instance, let's say you have a low low budget of $250,000, do you plan to get ten investors to invest $25,000 or 100 investors to invest $2500? Based on your understanding of your pool of investors, tailor the size of each share (or unit, if you form an LLC).  However, you would be wise to have a minimum amount to raise and a maximum amount to raise (yes, you would be dealing with the dilution of investment, but 100% of nothing is still nothing).  A good rule of thumb is to make your minimum amount the amount of your budget that will get you "in the can" or to post-production with a small editing budget so you can have a rough cut or trailer.

Crowdfunding has become a popular choice for restaurateurs who are unsure of the size of units they will need, or anticipate approaching a large swath of different investors.  Each crowdfunding company has a different set of rules for fundraising, and, very often, you have to provide your contributors with "rewards" in exchange for their funding. Kickstarter is the most famous of these companies, but Kickstarter requires the return of monies if a threshold is not met.  Other companies allow you to hold onto the monies raised, thereby allowing you to start a small pop-up, for instance, or have an alternate location.  Here is a rundown of a few crowdfunding companies: 

  • Kickstarter projects must reach goal in order for project creator to receive funds. Kickstarter is free to sign up, 5% fee to funds raised, plus Amazon Payments processing fees.
  • Indiegogo, on the other hand allows you to choose to get the funds earned for projects, whether or not the project reaches its goal.  Indiegogo charges a 4% fee to funds if the project reaches its goal, 9% fee to funds if it does not, plus 3% credit card processing fee and $25 wire fee for non-US campaign.
  • RocketHub is a lesser known crowdfunding site (but appealing for indie filmmakers), which also allows you to get the monies raised for a project, even if you don't reach you goal.  RocketHub charges a 4% fee to funds if the project reaches its goal, 8% fee to funds if it does not, plus 4% credit card processing fee. Also, RocketHub has an affiliation with A&E Networks, which you may find useful.

Management Structure

You may be a wonderful chef, even a visionary, but will you be the leader of the business? Food services may be your specialty, and a close friend or mentor may be more experienced in running the show. There are an enormous number of topics to discuss with an attorney. Have you thought about who will run this restaurant?  Will you split up responsibilities?  Are you giving any amount of control to investors?  Will company owners delegate responsibility to one or more managers? In a New York LLC, if the articles of organization do not specify the LLC is to be managed by managers, it will be managed by its members.  

How do you choose the managers? Will the "founders" be the managers? The creators of the company can be the managers for a definite or indefinite term, or leave it up to other members to elect the managers, much like a corporation's Board of Directors elects officers. Non-members can manage an LLC unless the operating agreement says they can't.  How can a manager be "fired?"  If it's not explicitly stated in the operating agreement, New York State LLC Law states "any or all managers of a limited liability company may be removed or replaced with or without cause by a vote of a majority in interest of the members entitled to vote..." Will the LLC have a board of directors? If so, law for LLC directors may not be the exact same as corporate directors. It is crucial for an LLC operating agreement to lay out many specificities about the purpose and function of the board.

If you have an S-Corporation, the considerations mentioned above in an LLC operating agreement are integrated into corporate by-laws. The by-laws set the rules for the corporation, but take a back seat to the "Certificate of Incorporation" that is filed with New York State.  In other words, if there is a conflict between the certificate and the by-laws, the certificate wins, because that is filed with the state. Nonetheless, your by-laws should be specific and wide-ranging, as in an operating agreement in a limited liability company. The by-laws should also address the whos, whats wheres, whens, and hows of shareholder meetings and director meetings.  By-laws should also lay out all aspects of management, the issuing of stock and transfers and assignments.

Next - Part 2: Leases, Labor, and Vendor Agreements