03 Jul How to start a Restaurant in Nigeria: The Legal Issues
Starting a Restaurant in Nigeria: The Legal Issues
Restaurants in Nigeria are big business. In this article, we will discuss the legal considerations entrepreneurs should have when looking to start a restaurant in Nigeria. Unfortunately, we will not be looking at the operational and business viability aspects of starting a restaurant in Nigeria, as that is not our expertise, our expertise is the law, and that is what we will stick to.
Starting a restaurant in Nigeria has its own set of legal considerations. These include choosing the right business structure, obtaining the proper licenses and permits, paying the relevant fees and levies, dealing with health and safety, getting adequate insurance, dealing with employees etc.
Choosing the right Business Structure
In order to set up your restaurant business in Nigeria there are potentially 4 types of structures you could adopt. You could decide to register as sole proprietorship, a partnership, a limited liability partnership (in Lagos) or a limited liability company. For the purposes of this article, we will only be discussing 2 types – sole proprietorship (registered business name) and the limited liability company.
A registered business name provides you with a flexible business structure with very little formal restrictions placed on you as the business owner. However, the biggest legal risk is the fact that there is no separate legal personality between you the owner and the business. In other words, in the eyes of the law, you and the business are one and the same. This means that you will have unlimited personal liability for things which emanate from the business. This personal liability can be towards customers, competitors, lenders, employees, and even the government.
An illustration of this would be if a customer suffered from food poisoning after eating a meal at your restaurant. You as the owner could be sued by your customer, and because there is no separate legal personality, you would be sued in your name as well as the business, and any legal liability would be unlimited towards you as the owner. Therefore, something that happened in the business could easily bankrupt you the owner.
On the other hand, setting up a limited liability company is generally the preferred structure for doing business in Nigeria, as it gives you the founder, limited liability from the company. The company has a separate legal personality from the person/people who set it up. So, if we use the same food poisoning illustration, if it occurred, and you were sued, it would be the company that would be sued and not you personally.
Also, from the perspective of a restaurant business, it also has certain tax benefits, for instance when you buy new (expensive) kitchen equipment for your restaurant, it can be purchased in the company name and then classified as a cost of the business rather than a personal expense.
We therefore suggest that setting up a limited liability company is probably the best structure for a restaurant to decide to adopt.
Licenses and Permits
In order to commence your restaurant business in Nigeria, you will need to obtain a variety of licenses and permits. In some cases, the licences you will need to obtain will be at the Local Government office, in other cases it might be at an agency of the State Government. Ensuring that you have the appropriate licences and permits is critical to your setting up of your restaurant business in Nigeria. The types of licences and permits vary by location, and so it is important that you seek out professional legal advice in the restaurant set up phase. Also, if for instance your restaurant will sell alcoholic beverages, there is a certain licence that will be required. If your business will be open at night time, or potentially past midnight, there is a specific permit that will need to be obtained. Getting the right legal support is therefore critical to starting your restaurant business on the right footing from a licence and permit perspective.
Health and Safety
The restaurant business is a very delicate and sensitive business, this is because restaurants are all about people eating food, therefore they are subject to significant regulations regarding food health and safety. Apart from the obvious permit which will be required for the preparation and handling of food, you should expect that your restaurant will be subject to regular monitoring and inspections by the local government or State government to ensure that you are keeping up to the relevant health and safety standards. Inspections may cover not only the food itself, raw and prepared, but also refrigeration systems, cooking equipment, and waste disposal, among other areas.
Apart from the health and safety of the food, another issue is the physical health and safety of the customers while in your restaurant. If your restaurant will be serving large numbers of people you may have crowd control issues and, therefore, need to obtain a license or permit from a fire or police department. Similarly, you probably will also need a permit or license relating to adequacy of exits from the restaurant and related emergency issues.
In running a restaurant in Nigeria, there are some restaurant-specific risks which exist like the customers or employees slipping and falling on the premises, someone getting hurt from hot liquid or broken glass, or someone becoming seriously ill from the food itself. These are on top of more generic business risks such as fire, theft, or other sources of property damage or personal injury.
It is therefore important that as someone interested in the restaurant business in Nigeria you sit down with your lawyer and an insurance agent to assess what the risks are, and try to protect your business from those risks by taking out adequate insurance policies. This is in addition to the compulsory insurance which already exists and which business owners in Nigeria must take out, for example – Occupiers Liability Insurance – This insurance is compulsory for all “public buildings” i.e. any building that is not 100% used by the owner for residential purposes. Occupiers Liability Insurance provides compensation in events of bodily injury, death and property damage in case of building collapse, fire, earthquakes, storm or flood.
Franchising is a business model where the owners, or “franchisors”, sell the rights to their business logo, name, and model to third party retail outlets, owned by independent, third party operators, called “franchisees”. Franchises are an extremely common way of doing business, examples of well-known franchise business models include McDonalds, Subway, KFC, Dominos etc.
In the restaurant business, if you sign up to a franchising business model, you as the franchisee, would have to first pay an initial fee for the rights to the business, training, and the equipment required by that franchise. Once the restaurant begins operating, you will generally pay the franchisor an ongoing royalty payment, either on a monthly, quarterly, or annual basis. This payment is usually calculated as a percentage of the franchise operation’s gross sales. After the contract has been signed, you will open a replica of the franchise restaurant, under the direction of the franchisor. You will not have as much control over the restaurant as you would have over their own business model, but you may benefit from investing in an already-established, name brand.
If this is the business model you intend to adopt, then it is imperative that you hire the services of a lawyer to not only review the Franchise Agreement, but also to conduct some due diligence on the franchisor to ensure there are no inherent risks that the franchisor might have which could impact on your restaurant e.g. existing litigation.
Discussing intellectual property in an article about starting a restaurant business in Nigeria might seem strange, but it is a very valid legal consideration to have. Today branding is key to the creation and survival of a thriving business, and therefore it is important that you protect your brand. The best way to protect your brand is by protecting the trademark.
When choosing your brand, you need to make sure it is available and does not infringe on anyone’s existing trademark, it is always advisable to get a lawyer to conduct a trademark search. Failing to research a brand before adopting it can lead to denial of registration by the Trademark registry or, worse, a cease and desist letter from another brand owner. Therefore, spending the time, money, and effort up front to determine whether a brand is available will help avoid the very high costs of a dispute or litigation.
Trademarks are also a potentially valuable asset which could appreciate in value over time, the more your business reputation and customer base grows, the more valuable your brand will be and can lead the way for expansion. If for instance you have big plans for your restaurant and you want to be able to franchise it at some point in the future, you definitely need to ensure that the brand is protected. Registering the trademark ensures that you are in the right legal position to be able to franchise your restaurant.
Apart from your brand, you could also consider trademarking some of your foods, for example McDonalds has registered trademarks on a number of their foods e.g. the ‘Big Mac’ burger and the ‘Chicken McNuggets’.
Finally, we come to what people love the most…tax!
There are number of compulsory taxes for all businesses in Nigeria, for example Companies Income Tax, Education Tax, Value Added Tax, etc. However, in certain States in Nigeria there are additional taxes which have been imposed on restaurants. For example in Lagos, the Lagos State Government imposes a sales/consumption tax of 5% on services provided in restaurants within the State.
Before setting up a restaurant therefore it is important that you get a lawyer who is familiar with the tax implications on your business and can ensure that you do not fall foul of the relevant laws.
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