Starting and Running a Food Truck Business | Dickinson Wright – JDSupra – JD Supra

Introduction
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 wonder why this option is so popular among food service entrepreneurs. First, starting a food truck is typically drastically less expensive than starting a brick-and-mortar restaurant. Second, profit margins for mobile food units tend to be higher than brick-and-mortar establishments. Third, mobile food units can be used to test the viability of a concept before committing to brick-and-mortar.
The mobile food unit craze actually celebrated its 10th 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 Ibis World, there are currently over 35,000 active food trucks in U.S. cities. The industry is projected to reach $1.2 billion in revenue in 2022. This is a massive jump from the $650 million revenue just a few years prior and relative nonexistence in 2008.
So how does Nashville measure up? According to Food Nation, Nashville is ranked 10^th out of the top 20 food truck cities. The ranking is based on scoring in three categories: obtaining permits and licenses, complying with restrictions, and operating a food truck. In Nashville, operating costs appear average, and the interactions with city officials appear 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
Are you considering the possibility of starting a mobile food unit? Some of the things you need to research include:
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.
Legal Issues/Considerations
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, starting a food service business as an unincorporated partnership or sole proprietorship is not advised. The incorporated options left on the table are Limited Liability Company or LLC, C-corporation (“C-corp”), and S-corporation (“S-Corp”). These 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, and what to do if one of the owners dies or becomes severely incapacitated are just some of the issues owners need to address before getting into business.
Trademark Protection
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 many 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.
Permitting
As with any food service business, food trucks require permitting 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 to congregate at various locations around the city. Other cities throughout Tennessee have similar requirements. If you plan to travel outside Nashville, you will need to check city and county permitting requirements before making sales.
One often overlooked requirement 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 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 a receptacle to dispose of gray and wastewater from the truck daily. Metro Nashville Public Works requires evidence of an agreement with a commissary kitchen 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 contractual commitment (i.e., typically a month-to-month leasing arrangement) to use their premises. Ideally, a commissary kitchen will have the following available:
Conclusion
Mobile food businesses can be a fantastic way to test a food concept before committing to brick-and mortar restaurant (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 and mortar. However, it is recommended that anyone looking to start a mobile food business perform a considerable amount of diligent research about cost before jumping into this business.
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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.
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