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Introduction

Owning a restaurant has to be one of the most tiring yet rewarding businesses to run. Often stemming from one’s own cooking passion or beliefs, a family tradition or heritage, a restaurant is most likely a very personal venture. This is why you should take no chances in making sure your contracts and legal arrangements are watertight and that you fully understand them. A lack of success can often be down to not having the right restaurant in the right place at the right time, marketing it wrong, running out of money or poor management (amongst many other things). However, a lot of these common problems can be alleviated, and you can protect yourself through knowing your rights and obligations with regards to the law and having the correct contracts in place. At the end of 2016, YouGov interviewed over 1000 UK SMEs and we had the stats analysed by the Centre of Business and Economics Research (CEBR). According to this research, the Food and Beverage Sector loses over £1.5 billion through not taking care of their legal business. Ignoring the law means legal problems will eventually bite, and we cannot express how important it is to protect your ideas and the foundations of your restaurant from the outset. We hope you enjoy this plain-English LawBite (we realise our name is quite apt here!) guide that we have created for starting a restaurant with the business’s legals in mind. Please note, some of these stages will of course over-lap and some things may not necessarily apply to you...

Corporate Preparation

We are assuming that you already have a Business Plan. Cash is king and running a restaurant is an expensive endeavour, particularly in its early stages. Your business plan allows you to visualise how much you’re likely to be spending, leaving room for error, against how much you’re going to have to make to cover that expense and hopefully turn a profit.

Choosing your company structure

At this stage you would also be deciding whether to open your restaurant alone as a sole trader, limited company (Ltd) or as a limited liability partnership (LLP).

Setting up as a sole trader is certainly the quicker and easier option as there are far less complicated accounts to file. However, you are personally liable for any losses accrued by the business. This means that creditors can go after your personal assets and your credit rating will almost definitely be affected, hindering your ability to borrow money.

To avert this heavy risk, most restaurateurs set up a limited company and as such register or ‘incorporate’ with Companies House (which you can do here), giving it its own company registration number and registered office address. As the company is registered at Companies House, certain business information must be filed with them and made publically available such as names of shareholders, directors and the company’s annual accounts.

Although there are many benefits to setting up your company as a Ltd, it is a more complicated status and you must comply with the Companies Act 2006. Benefits include:

  • Limiting your liability so your company is a distinct legal entity from yourself. Usually the only liability you have is the amount you invest in the company through buying its shares at their ‘par’ value - this the face value of the share - say £0.01 each - not its market value, so if you have 1000 shares of £0.01 each your liability is limited to £10 - as the ‘Limited’ name suggests, you receive legal protection from your company’s finances. If things were to go wrong, the creditors could not come after your own personal assets e.g. your house or that expensive painting handed down by uncle Geoffrey.
  • It is easier to expand your business if you want to grow. This is because potential trade partners won’t work with sole traders so having the ‘company’ status is valuable.
  • It is easier to raise finance if you’re trading as a company rather than an individual, again if you are looking to expand and need the extra cash.

Whenever you incorporate a company you automatically have to generate ‘Articles’ which are like the Company’s constitution, setting out how it is to run. It is advisable at this stage (if there is more than one person who is invested in the company as a shareholder) to have a shareholders’ agreement in place. This will govern how the company is run and who is meant to do what, preventing costly disputes later down the line. It will also dictate what to do in the case of a deadlock between shareholders. You can bet your bottom dollar that Pret founders Sinclair Beecham and Julian Metcalfe had a shareholders’ agreement in place, which meant they could smoothly divide the £350m fortune the restaurant had amassed when they eventually sold it. Prior to or in the course of implementing the agreement, you may also wish to consider amending the Articles of Association that ensure the terms of the shareholders’ agreement are reflected in the way directors run the company. This is a particular consideration when shareholders also act as directors.

You have to appoint at least one Director who has to ensure that the business is solvent at all times. There can be risks of being a director that you will need to consider. Even though someone can become a ‘non executive’ Director, in law they still have full responsibility for what happens, so you should have regular ( quarterly) board meetings where a note is made of the important matters, such as cash position, suppliers, credit, employment and regulatory issues. It is also important to keep a permanent eye on the solvency of the business, in other words is there enough cash to pay your creditors as and when they fall due, as well as the ‘balance sheet’ position. It is critical to fill in your returns and pay your tax and VAT on time, otherwise you may find that you are personally liable for any short falls that arise in the event of insolvency down the line.

Like a limited company, a limited liability partnership (LLP) is a separate legal entity in its own right. However, members of an LLP are taxed as self-employed individuals so the tax treatment of an LLP can be more beneficial than that of a limited company depending on the circumstances. It does, however, mean that a Partnership Agreement needs to be formed with another party and it will need a designated member who is responsible for making all the filings at Companies House. It is a legal requirement for there to be a partnership agreement which governs how this arrangement is run, which members of the partnership must stick to.

Guarding your ideas

At this point in time, you’re probably excitedly talking about your endeavour with anyone who will listen, which is great as it’s a fantastic way to soundboard ideas and sense-check your vision. Perhaps your restaurant will be particularly innovative and break new culinary ground (all of which will be discussed and carefully planned for in your business plan of course) which you’re going to want to keep secret until you’re fully established. The best way to do this is normally getting people to sign a confidentiality agreement or ‘non-disclosure agreement’ (NDA) before you start talking. Bear in mind they’re not only relevant at this stage but can be used whenever you want to secure some protection for your idea or intentions as you grow. For example, much later down the line you might be thinking of franchising your restaurant and need to recruit people and/or agencies to achieve this objective but do not want them to pass this information on.

Intellectual Property

You probably have an idea of what kind of food/drink you would like to serve and maybe even the look and feel of your business. At some point you’re going to have to stop to do a ‘branding’ exercise if you want to create a real name for yourself and become that restaurant which is fully booked weeks in advance. The list includes coming up with a restaurant name, logo and general designs for the website plus any marketing ‘collateral’ you might have and perhaps even a menu design (if you want to get really creative!). This is a three-step process: 1) Coming up with the ideas 2) Executing and 3) Protecting them. This is what’s known as your ‘IP’ (intellectual property) and although it’s not usually the first legal issue that comes to mind with restaurants, it IS valuable and therefore worth safeguarding.

Naming your restaurant

There are many different approaches here, and whilst this isn’t ‘a guide to branding and marketing’ we can certainly help you out with how to do it legally so you don’t run into any problems later down the line. On many occasions there have been restaurants (and shops) who have set up and begun trading only to receive a letter of complaint from a company which is already trading under that name (or something very similar) claiming that they are confusing the market and they must cease using it (and sometimes even reimburse for damages with an IP infringement claim). It’s pretty integral to follow these simple steps to make sure:

  1. It’s not already registered with Companies House and it’s allowed to actually be used in the marketplace. You can check this using their Company WebCHeck.
  2. It hasn’t been registered already as a trademark. You can check here using the Intellectual Property Office (IPO) ‘Search for a Trade Mark’ page.
  3. The website address/domain name is available. (Okay this is not specifically a ‘legal’ consideration and you can actually buy these off the domain’s owner, but that can be costly and you don’t need the hassle). Easily check here using 123-reg.

Do keep in mind, however, that you cannot trade mark certain things, so you might not be able to protect your brand entirely. Have a look at these brief guidelines on the government’s IP website before deciding on a name.

Logos and other design work

Another part of the ‘branding exercise’ is creating the look and feel of your restaurant. Unless you have fantastic design and branding skills (and the time to utilise them) you might want to hire a freelance graphic designer or an agency to create a logo and any other marketing collateral e.g. a slogan for you. If you do hire a designer or an agency, make sure you have a contract in place which specifies precisely who owns the intellectual property in whatever they create, as well as stating a deadline for the project and the costs involved. A ‘Supply of Services’ style contract would be a good place to start.

Again, bear in mind some images and phrases will not be able to be trademarked (an important step outlined below) so check the government’s IP website before making any final decisions.

Once you have these lovely branding creations in your grasp, you really should think about protecting them and this means registering a trademark. Having a trademark allows you to:

  • Take appropriate legal action against people using your brand without prior consent
  • Take appropriate legal action against people using your brand without prior consent
  • Use the famous ® symbol next to images of your brand which will act as a deterrent for those wishing to use it without your knowledge

How much does it cost to register a trademark?

It costs £170 to register a trademark in one class, which refers to the type of product or service the trademark refers to, e.g. ‘class 34: food and drink services’. Each additional class you need costs £50. These are the ‘official’ government fees though you might be interested in seeking professional help as the forms are quite complicated to fill out.

Recipes: Lifeblood of the Brand

Signature recipes are likely to be crucial to the success of a high-end food business. They will also automatically be protected by copyright, provided they have been written down (or recorded in some other way) and are sufficiently original.

Since individual recipes are often developed from, or based on, pre-existing recipes, independent creation can be a barrier to copyright protection. That said, copyright does not require the whole work to be original. So, if a recipe is essentially a rehash of the classic British favourite shepherd’s pie, the chances of protection are slim. If, on the other hand, a certain amount of skill or labour has been invested in the development of a new recipe, the contribution is likely to be sufficiently original to qualify for protection. This ultimately prevents other brands from making or selling the dish.

Novel and Inventive Elements

Some of the more obscure food compositions, production or cooking techniques and technological advances may even be worthy of patent protection, provided they involve a novel and innovative process. In view of the hefty costs involved though, patenting is not always an attractive or practical option for restaurateurs.

If, however, a brand has the means and opportunity to secure a patent it should consider taking advantage of this. Patents give monopoly protection for 20 years and thus make life difficult for competitors who may wish to mimic the creation. It’s also vital not to publicise the invention before applying for a patent (through trade food shows, demonstrations or otherwise) as to do so risks losing the possibility of protection.

Trade Secrets

Commercially sensitive information, knowledge of which creates an advantage over market competitors, may also be protected as a trade secret. This could cover all sorts of material within the food industry, including products, recipes, techniques and methods.

Just like copyright, trade secrets do not require registration. They do, however, require strict controls over their disclosure. Essentially this means that they should only be disclosed on a ‘need to know’ basis and imposing an express obligation of confidence. Practically speaking, asking third parties (including employees) to sign written confidentiality agreements before disclosing any secrets to them is always a shrewd measure to take.

IP Protection: An Investment Worth Making

Failure to protect the potentially wide array of intellectual property created by luxury food sector businesses can diminish and dilute what is, or could be, a hugely reputable brand. Make sure your brand development strategy makes identifying and protecting this valuable property a fundamental priority.

Securing Finance

Operating a restaurant is one of those business endeavours that does require quite a lot of capital, particularly when you’re starting out. If this is your dream, it shouldn’t be a stumbling block to begin and grow your culinary adventure. Here are a few traditional and not-so traditional (‘alternative finance’) routes you could take (aside from using your own cash) to fund that initial investment and considerations to take into account for each: Friends & family: Often the first port of call after your own investment. A good source, though conflict can arise when you bring money into any relationship. Make sure you have a loan agreement in place if you are borrowing the money or you may even want to give away equity (shares) here instead, bringing them more deeply into the business as a shareholder.

  • Banks: It is increasingly difficult to get a bank loan for a small business, though it is not impossible. You will have to provide the bank with very realistic cash flow forecasts, whilst proving that you will be able to pay back the loan with interest. Often - and here’s the important part - banks will want added security for their investment, which often means they’ll want to secure it against your possessions e.g. your car or house. Think carefully about how much you are willing to risk here. A good question to ask is what would happen to your lifestyle if the bank ‘calls in’ the security i.e. sells your home to repay your loan. They will give you a contract for the loan which you should ensure you understand fully.
  • Government loans: There are currently a few government initiatives who will lend to start-up businesses. One of the largest (that we work with) is Start Up Loans, which has been developed specifically for start-up businesses who have been trading less than 2 years. You can borrow up to £25,000, with an interest rate which is currently set at 6% (Sept ‘15). As this is technically a personal loan, you will be personally responsible for repaying that loan and will have to handle the repercussions if you cannot.
  • Private investors e.g. ‘Angels’ or Private Equity firms: With this option, you will probably be selling shares in your company in return for investment or it might be a loan. They will bring tough investor/funding agreements to the table so make sure you know what you’re giving up and what to expect from your relationship with them.

Some key points you must consider and understand would be:

  1. What is being paid, when is it being paid, and how it is being paid? E.g. is the money being paid all at once or in tranches?
  2. What is the payment in return for? I.e. what is the structure of the deal. This could be in return for shares or through a secured or unsecured loan. A ‘secured’ loan means it is secured against the company’s assets which gives more protection to the investor.
  3. If you are giving away shares, you will need to work out the valuation of the company. Once agreement on valuation is achieved between you and the investor, it’s possible to work out what 100% of the shares in the company are currently worth and then to work out what the investor’s contribution is worth.
  4. Remember, if you give away more than 25% of your company (i.e. your shares are worth less than 75%), you are giving away a substantial amount of control since you cannot pass a ‘Special Resolution’ e.g. to change the company name

  5. Next, you must decide what type of shares you are giving away, which is where it gets a little more complicated. The shares may be “ordinary” shares – but companies can have more than one class of ordinary shares. They may have “A” shares or “B” shares with different rights (e.g. the “A” shares carry voting rights but the “B” shares don’t). Some investors like to get “preference shares”, which carry a guaranteed return or “dividend” each year out of profits and usually are given preference in a situation if something is to go wrong. Some investors like to have “convertible” preference shares which they can convert into ordinary shares after a certain date so as to protect their position if the company starts doing well.
  6. Next, you must decide what type of shares you are giving away, which is where it gets a little more complicated. The shares may be “ordinary” shares – but companies can have more than one class of ordinary shares. They may have “A” shares or “B” shares with different rights (e.g. the “A” shares carry voting rights but the “B” shares don’t). Some investors like to get “preference shares”, which carry a guaranteed return or “dividend” each year out of profits and usually are given preference in a situation if something is to go wrong. Some investors like to have “convertible” preference shares which they can convert into ordinary shares after a certain date so as to protect their position if the company starts doing well.
  7. Finally, what kind of operational control are you giving up in return for the investment? Sometimes the type of share you give away will mean you will have to consult the investor on key business decisions such as the desire to raise further funding or changing the nature of the business.

Remember, any big investor worth their salt will carry out a thorough due diligence investigation so you must make sure to have all your legals under control with the correct paperwork and that your accounts are in line.

Side-note: Something which will make your company more desirable to invest in is if you can provide them with tax breaks by signing up to the Enterprise Investment Scheme (EIS) or Seed Enterprise Investment Scheme (SEIS). You can find out more information about registering your company for the scheme on the government website.

Essentially lots of people putting in relatively small amounts of money. There are 2 main types for you to consider and to understand the implications of each:

  1. Equity-based, for example Crowdcube (LawBite has raised twice on this platform) or Seedrs will receive a stake in the company via shares in the hopes you will grow and they will benefit. In this case, investors usually sign up to the company’s Articles and will receive a simple shareholding.
  2. Rewards-based, for example Kickstarter or Crowdfunder. In this case, investors will receive a tangible item or service in return for their money e.g. ‘invest £50 and you will receive 100 organic snack bars, invest £1000 and you will receive 5 years’ supply.’
    • Peer-to-peer lending or ‘crowdlending’: This is for more established businesses but one to mention as a consideration for future growth. Often an unsecured personal loan, money is loaned via an online platform such as Funding Circle in return for interest. The interest rate is set by the lender or it is established by the intermediary company based on the company’s credit analysis.
    • Pension-led funding: If you have a pension pot, recent legislative changes to pension rules means that you can now use it to fund your business. In return, you can receive tax-free payments from your business to boost your pension. For a more detailed explanation of how this could work for you, visit our partners over at Pension Led Funding.

As you can see there are many ways for you to access finance to launch your restaurant and this list is not exhaustive. If you want an easy and free way to see your finance options, go to Alternative Business Funding. For many of these scenarios, you will be engaging with others in a contractual agreement. You will need to have fully understood the terms and implications of these arrangements or you could be putting yourself at risk. It is very important however to receive independent financial advice when looking at any of the above investment alternatives, as the advisor will go through your finances with a fine toothcomb to ensure that you are not taking on an unnecessary financial burden.

Building a Website

Whilst having a restaurant doesn’t mean you HAVE to have a website, most people do a bit of research before going somewhere new and you’ll need to give these people a ‘taste’ of your brand and food before they decide to walk through the doors. If you can make your own website- great! But even if you can, you might not have the time so hiring someone to do it is your likely route. As with anyone who you engage with outside your company, for example a freelancer or an agency, you absolutely must have a contract in place before they undertake work with you. This will avoid any conflict over the cost and how it is to be paid, what is to be delivered and when. It will also deal with what is to happen if a problem arises.

Once you have built your website, there are certain legal requirements you must abide by as well which should be stated explicitly on your website, usually in the footer of the page or in an ‘About’ section. There are four main obligations you should be aware of, though not all will necessarily apply:

  1. Terms and Conditions of Website Use (T’s and C’s): This document is used if you run a website for consumers. It sets out the limits of your responsibilities when they use your website and some things which they are not allowed to do.
  2. Acceptable Use: Again, this document is used if you run a website for consumers. The document sets some rules for the consumers in the way that they are allowed to use your website.
  3. Privacy Policy: You will need this if you are collecting data at any point, for example if you wanted to send out a newsletter and you had to collect the user’s email address to receive it. This will state what you intend to do with the data, how it is stored etc.
  4. Cookies: You will need this if you are collecting cookies (a term given to mean the message that is sent from your website server to the user’s website browser, having entered in information which will allow the user to be identified).

A lot of websites will bundle these together in one or two documents, e.g. you will often find Website Terms and Conditions with the Acceptable Use Policy or the Cookies and Privacy Policy together.

Data Protection

What are my obligations with regards to collecting data?

get asked a lot about this, as it’s a particularly hot topic at the moment. The Data Protection Act 1998 defines how information about living people may be legally processed and handled. Businesses are required to comply with eight data protection principles and failure to do so may result in regulatory action by the Information Commissioners Office (ICO). The fundamental principles of data protection enshrined in the Act provide that personal data must:

  • be processed fairly and lawfully;
  • be obtained only for lawful purposes and not processed in any manner incompatible with those purposes;
  • be adequate, relevant and not excessive;
  • be accurate and where necessary, kept up to date;
  • not be retained for longer than necessary;
  • be processed in accordance with the rights and freedoms of data subjects under the Act;
  • be protected against unauthorised or unlawful processing and against accidental loss, destruction or damage; and
  • not be transferred to a country or territory outside the European Economic Area (EEA) unless that country or territory protects the rights and freedoms of data subjects.

If these principles are complied with, personal data may be processed for core business purposes (i.e. staff administration/business marketing activities) without the need to notify the Information Commissioner. If data is processed for other purposes, the Information Commissioner must be notified.

Subject Access Requests

It should also be noted that individuals have a right under the Act to obtain a copy of the information held about them. This is not limited to employees. If a business receives such a ‘subject access request’, a response must be given promptly and no later than 40 days and this covers all data, whether it is held electronically, in paper form or in any other form.

Review of Data Protection

SMEs should consider conducting a review of the personal data that they process. If sensitive personal data is processed, specialist advice may be needed and extra care taken where sensitive personal data (including details about race, political opinion, religious belief, trade union affiliation, physical or mental health, sexual life and the alleged commission of any offence) is concerned as conditions for processing such data are much more stringent than in relation to general personal data.

SMEs should consider conducting a review of the personal data that they process. If sensitive personal data is processed, specialist advice may be needed and extra care taken where sensitive personal data (including details about race, political opinion, religious belief, trade union affiliation, physical or mental health, sexual life and the alleged commission of any offence) is concerned as conditions for processing such data are much more stringent than in relation to general personal data.

New EU General Data Protection Regulation 2018 (GDPR)

In light of the foregoing and several recent high-profile ICO decisions and a heightened awareness of data protection by the general public, all businesses including SMEs need to have a proper understanding of their obligations under the Data Protection Act when handling personal data. Furthermore, with the forthcoming EU General Data Protection Regulation (GDPR), an even more stringent data protection regime, increased financial penalties and a wider definition of ‘personal data’, due to come into being in 2018, the need for small businesses to tighten up their data protection procedures has never been greater.

The GDPR is expected to become law in 2018 and whilst the UK may have voted to leave the EU, the regulation will affect all UK businesses due to the expanded territorial reach provided for in the Regulation. The GDPR applies to data controllers and processors outside the EU whose processing activities relate to the offering of goods or services to, or the monitoring the behaviour (within the EU) of, EU data subjects.

This means in practice that companies outside the EU targeting customers in the EU will be subject to the GDPR. As such, UK companies will be obliged to comply and in any event, it appears that the UK will still be within the EU in 2018 when the Regulation is due to come into force. Therefore, legal services for businesses going forward must necessarily include compliance with current data protection principles and with the new GDPR by 2018, in order to minimise the risk of finding themselves at odds with the new rules and open to hefty fines.

The GDPR introduces new principles such as the new ‘Right to be Forgotten’ ( or right to erasure) which is the right of an individual to insist on erasure of the record if there is no good reason for it to be held and the ‘Right to Data Portability’ which is a right to have information that is not stored in ‘silos’ which are incompatible with each other.

Conclusion

We hope you enjoyed Part 1 of our plain-English guide to setting up a restaurant. Parts 2 and 3 will go into detail about property, compliance and running your business so do have a look at them too. Of course none of this information is a complete substitute for professional legal advice so if you’re confused about any of the above or would simply like the reassurance of a solicitor, LawBite offers a free 15-minute consultation, which you can access by submitting an enquiry here. Good luck!

Contributors:

Lizzie Knight, Head of Marketing
Jeremy Barnett, Regulatory and Food Safety Barrister
Hannah Newell, Corporate and Commercial LawBrief (LawBite lawyer)