Originally published in the October/November 2018 issue of the Nashville Bar Association Journal
Author: Rachel Schaffer Lawson
It seems anywhere you go in Nashville these days you will happen across a food truck or two loitering at a local business or parked downtown. Indeed, almost any local Nashville event has a gaggle of mobile food options as the primary food provider. You may be wondering why this option is so popular amongst food service entrepreneurs. First, the cost of starting a food truck is typically drastically less than a brick & mortar restaurant. Second, profit margins for mobile food units tend to be higher than brick & mortar establishments. Third, mobile food units can be used to test the viability of a concept before committing to brick & mortar.
The current mobile food unit craze is actually celebrating its 10-year anniversary in 2018. In 2008, the first “modern” food truck was started in Los Angeles by two entrepreneurs craving Korean-style beef in a Mexican taco. Kogi Korean BBQ would gross $2 million in its first year of operations. Kogi’s success has spawned a mobile food revolution of imitators seeking to ride Kogi’s coattails to financial success.
According to Food Nation, a project of the U.S. Chamber of Commerce Foundation, there are currently 300+ active food trucks in U.S. cities. The industry is estimated to have reached $2.7 billion in revenue in 2017. This is a massive jump from the $650 million in revenue just a few years prior and relative nonexistence in 2008.
So how does Nashville measure up? According to Food Nation, Nashville is ranked 10th out of the top 20 food truck cities. The ranking is based on scoring in 3 categories: obtaining permits and licenses, complying with restrictions, and operating a food truck. In Nashville, operating costs appear to be average and the interactions with city officials appear to be manageable. Truck registration costs are on the high side, according to the Nashville Business Journal.
So what does it take to start a mobile food business? This article will cover the pros and cons of different types of mobile food units as well as compare the costs between mobile units and brick and mortar restaurants. In addition, it will discuss the following legal issues surrounding mobile food units: selecting and forming a corporate entity, multiple owner issues, trademark protection, permitting and commissary kitchen requirements.
Types of Mobile Food Units
So you are considering the possibility of starting a mobile food unit. What types of units are out there? What are the cost differences between mobile and brick & mortar? The type of vehicle you use for food vending can limit the revenue you could earn each day, decide parking or vending locations, dictate the type of products you can offer, and impact the bureaucratic process you have to experience.
The most important factors to keep in mind when considering what type of mobile food unit to start are your budget, revenue goals and operating processes, and finding a balance between all three.
Now that you have decided what type of mobile food unit to start, it’s time to take a deeper dive into the legal considerations surrounding mobile food businesses.
Entity Selection and Formation
Choosing the proper type of entity is an issue for all types of businesses as every type of business has some degree of risk. In food service, the risk tends to be higher due to the public ingesting the end product. Therefore it is not advised to start a food service business as a unincorporated partnership or sole proprietorship. The incorporated options left on the table are limited liability company or LLC, C-corporation (“C-corp”) and S-corporation (“S-Corp”). All of these types of entities will provide a shield of liability protection between the owners’ personal assets and the general public. C-corps can easily be taken out of consideration due to the double-tax issue, meaning when the business brings in revenue it is taxed first at a corporate rate and again when the owners pull money out of the business. This fact makes the C-corp not ideal for most small businesses. The LLC and S-corp are both “pass-through” tax entities, meaning revenue is “passed through” the corporate entity directly to the owners. One of the major differences between LLCs and S-corps is how owners are treated. In an LLC, the owners are called Members and are required to pay quarterly estimated taxes. In an S-corp, the owners are considered employees of the business and taxes are withheld from paychecks. I do not typically recommend an S-corp for a new businesses owner because more often than not, revenues will not be steady starting out and having to manage payroll tax immediately is not something a business should have to worry about in the startup phase.
Many food service businesses are started with multiple owners. If this is the case it is imperative that the owners take the time to get an agreement in place amongst themselves before making a single sale. Things like profit and loss split, equity split, what to do in the event of a conflict, what to do if one of the owners dies or becomes severely incapacitated are just some of the issues owners needs to address before getting into business.
Competition for market share in the food service industry is fierce. As a result, coming up with a good brand name and logo design can be critical to success. However, due to the large amount of players in the marketplace, trademark infringement runs rampant. It is highly encouraged for anyone starting a food service business to engage in a full state and federal trademark search of the proposed name and logo. The last thing a business owner needs is to invest a substantial amount of money into a name or logo design and begin operating only to find out the name has already been federally protected and the only option is to change the name. While it may not be possible to federally protect a local mobile food business, taking the steps to protect the name in the state of incorporation is highly advised as it could deter a local competitor from trying to use the name and it could defeat or cancel a federal trademark filed after the local business has begun operating.
As with any food service business, food trucks require permitting in order to operate. City and county business licenses are needed, certificates of registration for sales & use tax, and inspections by local health departments are all required. In addition, should the mobile food unit want to serve in certain areas of Metro Nashville, the business must obtain the proper permit through the Public Works Department in order to congregate at various locations around the city. Other cities throughout Tennessee have similar requirements. If you plan to travel outside of Nashville you will need to check city and county permitting requirements before making sales.
One of the often overlooked requirements of all mobile food units is a commissary kitchen. Most mobile food units do not have the capacity or ability to prepare food directly on the unit. Therefore, they need an off-site location in order to store food products and prepare them. This location MUST be a health-inspected certified commercial kitchen (i.e. preparing items in your home kitchen is not permitted). This location also needs to have a receptacle to dispose of gray and waste water from the truck each day. Metro Nashville Public Works requires evidence of an agreement with a commissary kitchen in order to get permits to congregate in designated food truck areas.
Commissary kitchens are available throughout most cities, however due to the popularity of food trucks, many of these establishments have wait lists. These establishments will require some kind of contractual commitment (i.e. typically a month-to-month leasing arrangement) in order to use their premises. Ideally, a commissary kitchen will have the following available:
- Dry goods storage
- Adequate freezer and refrigeration storage
- Adequate cooking facilities (many commissaries have a “shared” kitchen that several businesses use)
- Dock for deliveries
- Parking for unit overnight that includes power hook ups
- Gray and waste water disposal
Mobile food businesses can be a fantastic way to test a food concept before committing to brick & mortar (examples: Biscuit Love and The Grilled Cheeserie both started as food trucks). The profit margins also tend to be higher on mobile food units than brick & mortar. However, it is recommended that anyone looking to start a mobile food business due a considerable amount of diligent research about cost before jumping into this business.