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Want to Open a Bar? Expert Tips for Clearing Legal Hurdles

June 3, 2015
Small Business
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The neighborhood bar may be a fun place for patrons to kick back and forget their cares for a while. But for the owner — even with a pint in hand — it can be a source of stress and numerous expenses. Myriad legal hurdles must be cleared to open and operate a bar, and failure to comply with laws and regulations can result in fines or even closure.

Ryan and Nikki Whaley

Ryan and Nikki Whaley, owners of the Volstead Bar in Sandusky, Ohio.

Prospective bar owners have to work with three layers of government and regulation, says Paul Saputo Jr., a lawyer in Dallas who previously owned and sold a bar in Durham, North Carolina. You must deal with federal, state and local bureaucracies, each with its own rules, he says.

“You have to be in compliance with all these varying layers of government intrusion, and alcohol is a very political issue,” Saputo says. Government, he says, will come after businesses not in compliance, regardless of size. “A lot of people don’t understand how intricate the whole process is and how many things there are to consider.”

The process is also time-consuming. Once Ryan Whaley and his wife, Nikki, decided to open a tavern in Sandusky, Ohio, it took a year and a half before the Volstead Bar was ready for business. Most permits took one to three months to obtain — sometimes because the couple had to wait on the government, and sometimes because it took them that long to make required changes.

If you’re planning to open a bar, follow these expert tips to ensure you’re operating on the right side of the law — and consider hiring a lawyer to help you navigate the rules.

1. Know your state’s quirks

Every bar in the U.S. must apply to sell alcohol through the federal Alcohol and Tobacco Tax and Trade Bureau, but each state has its own permits and requirements. Some dictate when you can be open and sell alcohol.

For example, some states, such as Pennsylvania, have a limited number of liquor licenses granted by the government. If you’re opening a new bar without an existing license and the limit has been reached, you must buy one from someone else. This can cost $80,000 to $200,000, says Alva Mather, a lawyer focused on alcoholic beverage law at Griesing Law in Philadelphia.

In Tennessee, on the other hand, any business that meets the right criteria can have a liquor license, says Tucker Herndon, an attorney specializing in alcoholic beverage law at Bone McAllester Norton in Nashville. However, the state doesn’t allow “bars” that sell alcohol only. To get a license, an establishment must be a “restaurant” with a menu that includes at least a few hot items, Herndon says. To make things murkier, individual cities also have their own rules.

Hidive Bar in San Francisco

Hidive, one of several San Francisco establishments owned by John Caine.

2. Make your business official

Many entrepreneurs open bars with family or friends and want to keep it casual. But experts recommend you take it as seriously as any other business relationship. A common mistake is failing to draw up a business plan and operating agreement to ensure that all owners are on the same page, says John Caine, who owns Hidive, Café Mars and Julie’s Supper Club in San Francisco.

John Caine

John Caine

If you’re going in with partners, the owners’ individual lawyers should work out the arrangement together, recommends Benjamin Newby, a nightlife consultant in Chicago who has helped open bars across the country.

Herndon says it’s also smart for most bar owners to form a limited liability company. If you don’t, you’re a sole proprietor by default, leaving your personal assets at risk if you’re sued or default on a business debt.

Although there’s a small set-up fee and you may have to pay separate taxes, LLCs get substantial protection, Herndon says. It’s especially smart for bars, he says, since “there’s more liability in the bar industry because you’re serving alcoholic beverages and have more exposure.”

But simply forming an LLC isn’t enough, Herndon says. You must have governing documents in place. “Without an operating agreement or bylaws, you lose the ability to know in advance” what the fallout will be “if things aren’t perfect,” he says. This is especially important if one of the owners wants out. Governing documents outline how an owner can leave the business, helping to avoid a legal battle.

3. Work with the community for zoning

Saputo says local zoning laws and ordinances are often hard to understand and are tinged with politics. It’s imperative that the location you pick for your bar be properly zoned for whatever you plan to do, be it selling alcohol or hosting live music.

Some municipalities will provide variances and give you a break if you can bring value to an area, especially if it’s in the process of revitalizing, Whaley says.

But Mather notes that trying to open a bar without proper zoning or obtaining an exception to zoning laws can anger the neighbors, who might not like the idea of people out late and drinking around their property. So tread carefully. Bring in a lawyer before you buy property to ensure you can carry out your desired activities in the space, and be aware of noise ordinances to avoid trouble from neighbors.

If you fear pushback, communicating with city officials and getting their support helps, Whaley says. “Go to the city offices and local municipalities, say ‘this is what I want to do,’ and see what type of feedback you get,” he says. He suggests talking to your local economic development corporation. It’s the corporation’s role to bring in business, so you may find an ally.

The Firm in Durham, North Carolina

Zoning and permitting regulations may determine whether you can have live music at your bar, or even such things as dart boards. Above, Paul Saputo Jr.’s former bar, The Firm, in Durham, North Carolina. 

4. Be prepared for a multitude of small licenses, permits and costs

Every bar needs a license to sell alcohol, and any establishment selling food needs health inspections, but you may not be aware of all the other permits and licenses you need.

You must pay for the rights to play recorded music and show televised sports, for example. Failure to do so could result in fines and possibly lawsuits. The prices are generally based on the size and capacity of your establishment.

Saputo learned that his municipality required an amusement permit for having darts, pool or electronic games. Caine says some municipalities, such as San Francisco, require an entertainment permit for playing live music, DJs included.

Newby says some of these permits depend on the size of your bar. For example, a popular rooftop bar in Miami took a hit when it learned after opening that because the bar’s capacity was over 99 people, it needed a public performance license for DJs. If someone issues a noise complaint and it’s found you don’t have proper permits, expect fines and potential damage to your brand as you wait for permits to come through.

There are also costs to comply with regulations you may not expect. An inspector asked Whaley to replace toilet seats because the ones he had were for residential use instead of commercial. He had to have some plumbing redone because inspectors said water from the taps on his sinks had to be a certain temperature.

Whaley learned through the process of opening the Volstead Bar that government agencies often don’t work together and may give conflicting instructions. One move that helped him was to bring the state liquor agency rep, the city inspector and the food department inspector together in the empty space at the same time to figure out exactly what needed to be done.

5. Get liability insurance

“People need to be making decisions about how they want to protect themselves from potential legal problems down the line,” Mather says.

Be aware of premises liability. If you don’t have a safe environment, you can be held liable if, for example, someone hurts himself falling down your stairs, Mather says.

Then there’s dram shop liability. This is a law in most states that holds bar owners liable if they over-serve alcohol and a third party is harmed (say, hit by your patron in a drunken-driving accident). Bar owners should make sure they have appropriate insurance to protect themselves for both types of liability, Mather says.

6. Put clear HR policies in place

Employee relations issues often bite bar owners, Newby says. Without proper training and policies in place, you’re in a bad position if an employee tries to sue for a hostile work environment or other issues, he explains.

Benjamin Newby

Nightlife consultant Benjamin Newby has helped bars open all over the country. He urges bar owners to make policies clear to all employees.

Owners should have all staff “go through sensitivity training as part of overall training,” Newby says. “Make sure there’s an employee handbook that everyone signs. Then … you’ve done your due diligence.”

This and other efforts help you create a “paper trail” that protects you. For example, if you tell an employee verbally that he or she isn’t doing a good job, email the managers and let them know. If there’s a second incident, have the employee sign something indicating it was discussed and file it away. “Then if they mess up again, you’re in a position where you can safely and legally terminate,” Newby says.

He also recommends having a disciplinary procedure in place that’s understood by staff. As a side note, he encourages background checks when hiring, especially for security staff.

Caine recommends sticking to labor laws and policies even if your employees seem unconcerned. For example, state law dictates a certain number of employee breaks, but Caine says his staff didn’t want to take them, so he didn’t require them to. This later became an issue when an employee lawsuit was filed against Caine and records showed people weren’t clocking out. After paying a settlement, Caine hired an HR company and began operating more strictly to avoid such issues.

Bonus tip

There’s one thing all experts agree on: Don’t publicly announce an exact opening date. It’s common to encounter setbacks related to zoning, permits or other legal challenges, so consider telling people what season you plan to open instead.

To get more information and compare funding options for your small business, visit NerdWallet’s best business loans page. For free, personalized answers to questions about financing your business, visit the Small Business section of NerdWallet’s Ask an Advisor page.

Emily Starbuck Crone is a staff writer at NerdWallet, a personal finance website. Email: [email protected]. Twitter: @emstarbuck.

Image of Ryan and Nikki Whaley courtesy of Volstead Bar. Image of John Caine by Brian Molyneux. Image of Benjamin Newby by Jesse Fox/Cincybeat.