Complete guide: How to start a restaurant

Step 1. Create a business plan

As with any business, your first step should be to create a business plan. A business plan outlines the details of your business, such as your customer base, mission, and competitors. According to the SBA, these are the key elements you should include in your business plan:

Executive summary

The executive summary briefly describes your company—in this case, your restaurant. Include your mission statement, the type of cuisine you plan to serve, and basic information about your employees, customers, and location. Also include your growth plans if you intend to ask for financing.

Company description

The company description is the time to go into detail about your restaurant. In this section, be specific about your customers, your restaurant’s organization, and the competitive advantages your restaurant will have over other restaurateurs’ establishments. You should also explain why your location is perfect, with data to back this up. List any experts on your team, such as a highly-rated chef. Focus on your restaurant’s strengths.

Market analysis

The restaurant industry is competitive. If you want your restaurant to succeed, you need to know your target market. Your market analysis allows you to research the restaurant market in your area. For example, if there’s an Italian-American restaurant within every square mile of your town, it might be challenging to open a similar type of eatery. Again, use data here as much as possible. This section allows you to identify your strengths, explain why your restaurant will succeed in your area, and determine your pricing. It also allows you to analyze what your competitors are doing and what you can do better.

Organization and management

In this section, explain the structure of your restaurant, including the chefs, waiters, cashiers, general managers, line cooks, and so forth. You should also explain your business’s legal structure, which we’ll explore in more depth in the next section.

Service or product line

The service and product line section is your time to provide details on two major components of your restaurant: your menu and your service. Your sample menu should include all of the dishes you intend to serve, including prices based on a detailed cost analysis. This will allow potential investors to make financial projections to determine how your restaurant will grow. The second part should explain your service style. For example, do you want counter service to give customers their meals as soon as possible? Or do you have an exquisite wine menu and need a sommelier? Providing information on how your service will be unique will show investors how you value your customers.

Marketing and sales

The restaurant market can be extremely competitive, which means you need a clear marketing plan. Word of mouth is important, but you need to consider every possible channel and opportunity to get your name out there. Your goal in this section is to describe how you plan to attract and retain customers through marketing and sales strategies, social media, and advertising. You can describe any in-house marketing plans or whether you intend to hire a PR/marketing firm to help generate attention.

Funding request

Startup costs can be extensive, so you may need to seek funding for your restaurant concept from lenders. In this section, you want to clearly articulate how much financing you’re going to need and how you will use it. Investors and banks want to ensure their money is being used wisely, so specify if the funds will be used for equipment, payroll, or bills.

Financial projections

In addition to your funding request, it’s important to also include your financial projections. This will tell investors how you plan to grow your restaurant and make it successful. This section contains forecasted income statements, balance sheets, cash flow statements, and any graphs or charts that tell your financial story.

Appendix

The appendix is a place for you to include other relevant materials that support the points you make in the main sections of your business plan. In your appendix, you can include your logos; resume; photos of your appetizers, entrees, desserts, and beverages; credit history; permits; legal documents; the raw data you have collected in your research; and more.

Why it’s important to write a business plan

As you can see, writing a business plan takes a lot of time, thought, and work. To ensure it’s soundproof, make sure to get help from your accountant for financial projections, PR manager for marketing, and other professionals. With a solid business plan in place, you’ll better understand your goals and how to make your restaurant successful.

For a more detailed look at business plans, be sure to check out the full QuickBooks guide to building a business plan.

Up next: Select your legal structure

Step 2. Select your legal structure

An important aspect of starting a restaurant is selecting the right legal structure. When it comes to choosing a business structure, you have several options:

Limited liability company (LLC)

Most restaurants and small businesses typically choose LLCs because LLCs offer many benefits. The main attraction of LLCs is that they typically protect you from personal liability. This means your personal assets, such as your savings, home, and car, will be protected if your restaurant faces bankruptcy or lawsuits. Profits and losses can pass through to your personal income, which means it won’t face corporate taxes. However, as an LLC member, you are considered self-employed, which means you’re responsible for self-employment taxes.

Sole proprietorship

Another popular business structure for restaurant owners is a sole proprietorship. Sole proprietorships are typically the easiest to form and provide the most freedom. Unlike an LLC, sole proprietors’ business assets and liabilities aren’t separate from their personal assets and liabilities. So, if your business faces bankruptcy or lawsuits, you may be held personally liable for debts and other obligations. However, a sole proprietorship is often a good idea for those who want to test a business idea before establishing a more formal business.

Partnership

If you’re looking to open a restaurant with someone else, say your spouse or friend, a partnership might be your best bet. There are two types of partnerships: limited partnerships (LPs) and limited liability partnerships (LLPs). With an LP, only one general partner has unlimited liability, while all other partners have limited liability. The partners with limited liability typically have limited control over the company. Profits pass through personal tax returns, and the general partner with unlimited liability pays self-employment taxes. LLPs, on the other hand, give limited liability to every owner. Each partner is protected from debts against the partnership and isn’t responsible for other partners’ actions.

C corporation

C corps are a legal entity separate from its owners. This means they can make a profit, be taxed, and be held legally liable. C corps offer the strongest protection to their owners from personal liability, but the cost to create one is much higher than the other structures. Unlike the previous structures, C corps pay income tax on their profits, and sometimes again when dividends are paid to shareholders on their personal tax returns. C corps have the benefit of raising capital through the sale of stock and can be an excellent option for businesses wanting to “go public.”

S corporation

S corps are another type of corporation but are designed to avoid the double taxation C corps face. They allow profits and some losses to pass through the owner’s personal income without facing corporate taxes. S corps can’t have more than 100 shareholders. And like a C corp, they continue operating if a shareholder decides to leave the company or sell their shares.

Which legal structure is best for your restaurant?

Overall, most restaurants choose the LLC structure. This is because LLCs can choose how they want to be taxed, whether as a C corp or a pass-through entity (S corp). LLCs also allow restaurant owners to divide profits how they choose. This differs from corporations, which must divide profits based on how much equity a shareholder has in the company. Deciding what business structure to choose can be confusing, which is why we recommend you work with your accountant to determine the right one.

For more information, read our complete guide to what is an LLC.

Up next: Register for state and local taxes

Step 3. Register for state and local taxes

Restaurants get taxed for multiple reasons, such as their location, profitability, number of employees, the size of the property, and so forth. With that said, it’s important to register for state and local taxes to ensure you’re not breaking any tax laws.

To register for state and local taxes, you’ll first need to obtain an Employer Identification Number (EIN) from the IRS. Once you have your EIN, you’ll use it on your state application to register for state and local taxes. Each state and local government has its own tax laws and restaurant sales tax.

You can find your state obligations on the SBA website.

Up next: Step 4. Secure necessary licenses, permits, and insurance

Step 4. Secure necessary licenses, permits, and insurance

To open and operate a restaurant, you’re required to have several licenses and permits. Failing to do so can result in penalties and fines and can even prevent you from opening your doors at all. Some necessary licenses, insurance, and other permits you’ll need to get started include:

Business license

This license legally allows you to run and operate a business and can be obtained through your city and state government. You can find more information on local and city licenses on the SBA website.

Employer Identification Number (EIN)

An EIN provides you with a tax ID, which lets the government know you’re an employer and allows you to hire and pay employees. You can apply for an EIN on the IRS website.

Liquor license

If you plan on selling liquor or other alcoholic beverages, you’re going to need a liquor license. In some cases, you may need a separate wine and beer license, depending on your state. Your local government typically distributes these licenses.

Food handler’s permit

Employees in charge of handling food, such as chefs, will need a food handler’s permit, also known as an employee health permit. This permit states that the employee has had the proper education and training on health and safety practices in a commercial kitchen. This permit is typically issued after an employee takes a state-certified food handler’s course and passes the test.

Building health permit

This permit is issued by your local government and states that the building your restaurant is located in passes sanitation regulations.

Sign permit

Believe it or not, if you plan on putting your restaurant’s name and logo on your storefront, you’ll most likely need a sign permit. This permit lets you display a sign outside your restaurant that meets city and county signage rules for size, brightness, and location. To get one, you’ll typically need to visit your local county’s government website.

Commercial property insurance

When looking at commercial property insurance, some coverage you might want to consider includes spoilage, sewer backup, business income, equipment breakdown, employee theft, and utility interruption.

General liability insurance

This insurance coverage can help protect your restaurant from property damage and bodily injury claims that result from accidents. It also covers product liability, which means your restaurant will be protected from lawsuits resulting from food-borne illnesses. General liability insurance also includes coverage for any damages to the property you’re leasing, such as kitchen fires.

There are numerous types of permits, licenses, and insurance coverages you need as a restaurant. And depending on the type of restaurant you own, you may need additional licenses and permits, such as a music license, pool table permit, or valet parking permit. To determine which permits are right for your restaurant, make sure to consult with your business lawyer.

Up next: Set up your accounting processes

Step 5. Set up your accounting processes

Restaurant accounting is a little different than the accounting processes of other businesses. This is because restaurants must also factor in tips in addition to their revenue. Tips are considered employee income, not restaurant income, so they don’t need to be withheld. However, employees still must report tips to you, and you both must pay taxes on them—they just don’t need to be reported as restaurant revenue.

There are two standard accounting processes restaurants can use: the cash method and the accrual method.

Cash basis accounting

With cash basis accounting, income is reported as it’s received and expenses as they’re paid. For businesses that make less than $25 million per year, this is often the preferred method due to its simplicity.

Accrual accounting

With accrual accounting, income and expenses are reported when they’re billed and earned, regardless of when the money is received. This is the standard accounting method for businesses bringing in high revenue, as it’s often more accurate and provides a clearer accounting picture.

To determine the best restaurant accounting method, it’s a good idea to consult with your accountant. However, many restaurants don’t need a full-time accountant on staff. With QuickBooks accounting software, you can easily track income, expenses, and more to grow your restaurant. Our accounting software also allows you to organize receipts and other documents to stay tax compliant and maximize deductions come tax time.

Up next: Select your payment system

Step 6. Select your payment system

Once your accounting process is set up, it’s time to select a payment system to begin collecting and processing payments. If your restaurant already has a point-of-sale (POS) system, you’ll want to find a payment processor that easily integrates. If you don’t have a POS system, your best bet is to find a payment processor that already has it included.

Before signing a contract with a POS service provider, do your research. You want to ensure the provider you work with meets your business needs, fits your budget, has excellent customer service, and is easy to use. QuickBooks Payments allows you to accept debit cards, credit cards, and ACH bank transfers,1 so your restaurant can collect payments with ease.

Up next: Understand your tax obligations for a new restaurant

Step 7. Understand your tax obligations for a new restaurant

There are a lot of taxes that businesses are responsible for paying. As a restaurant owner, knowing the taxes you’re responsible for is crucial. Make sure you don’t fall behind filing and paying the following taxes:

Income tax

Income taxes are based on your restaurant’s net income, and how they’re paid depends on your restaurant’s legal structure. Besides partnerships, all businesses file an annual income tax return, while partnerships file an information return.

Self-employment tax

As a restaurant owner, you’ll most likely be labeled as a self-employed worker. This means you’re required to pay self-employment taxes, which go toward Medicare and Social Security.

Estimated tax

Sole proprietors, partners, and S corp shareholders are often subject to estimated taxes. Estimated tax is a method used to pay taxes on income that’s not subject to withholding.

Employment tax

Employment tax consists of federal income taxes employers must withhold from an employee’s paycheck to fund Social Security and Medicare. Employers must use Form W-4 to calculate how much income to withhold and are responsible for sending these taxes to the IRS.

Sales tax

All states require restaurants to collect sales tax on any food, beverages, and other items sold. The sales tax rate varies state by state, and sometimes even by city.

Property tax

If your business is located on a piece of property, the city or county your restaurant is located in will require you to pay property taxes.

Up next: Opening a new restaurant: Frequently asked questions

Opening a new restaurant: Frequently asked questions

How much does it cost to start a restaurant?

No two restaurants are the same, which means the cost to start your restaurant business venture can fluctuate significantly. However, according to a recent survey, the cost of starting a restaurant can range anywhere between $175,500 and $750,500. The price fluctuates based on a variety of factors, such as:

• Location
• Construction
• Building size
• Decorations
• Restaurant equipment
• Technology
• Sales and marketing
• Food and beverages
• Number of employees

What’s the best location for a restaurant?

As the real estate mantra goes, “Location, location, location.” Location is key when it comes to finding a spot for your restaurant to call home. To find the best site for a restaurant, look for the following factors:

• There is plenty of parking.
• You have the right amount of space—not too big, not too small.
• There is plenty of foot and car traffic.
• You sign a lease with favorable terms.
• You have the right neighbors—if there are multiple restaurants in a row, competition can be tough.
• The building is safe and is up to code.

What factors cause restaurants to fail?

No matter what type of business you own, being a business owner is hard work. Restaurant owners have their own set of challenges, which can result in them not making it far. Some reasons restaurants fail include:

• Poor customer service
• Poor business strategy
• Insufficient marketing
• Not enough funding
• Hiring the wrong staff
• Poor inventory management
• Bad food quality
• Disorganized management
• Problems with the menu

As you can see, there are many reasons why a restaurant can fail. However, knowing the causes can make you aware and help you avoid these issues.

What makes a restaurant successful?

There are a few key factors that can make a restaurant successful. Knowing them can help your restaurant make a favorable first impression and set itself up for success. Some elements of a successful restaurant include:

• Great customer service
• Ambiance
• Quality of menu items
• Appropriate pricing
• Unique concept
• Memorable logo
• Functional website

How do you start a restaurant with no money?

Owning a restaurant is a dream for many. However, a lack of money can be a major roadblock. Along with this complete guide on starting a restaurant, some additional tips for starting a restaurant with no money include:

• Crowdsourcing and fundraising
• Finding an investor or angel investor
• Starting small with a pop-up restaurant, catering business, or food truck
• Working with a mentor
• Seeking help from your local restaurant association
• Taking out a restaurant loan

1. QuickBooks Payments account subject to eligibility criteria, credit and application approval. Subscription to QuickBooks Online may be required.