When opening a business, it’s important to have all of your legal ducks in a row. When it comes to opening a business that involves liquor, it’s even more important that every aspect of your business—in terms of avoiding litigation, liquor liability, and proper insurance—are set firmly in place to ensure you don’t hit any road blocks after opening day.
Larry Stoddard III, an attorney formerly with Avelino Nitkewicz LLP in New York City, is an expert when it comes to asset protection and liquor liability laws concerning bar and nightclub owners. He recently took the time to sit down with us and explain exactly which matters bar owners need to have under control before opening up shop.
BBM: What is the first step a bar owner should take in terms of avoiding litigation and liability issues?
Stoddard: The first thing is to create a corporate entity structure. This is the one thing I don’t find that people have an issue with, because it’s relatively easy to get incorporated. You want to make sure you have the proper structure, whether it’s an S Corp or an LLC. After that, you’ll want to consult with a tax advisor, depending on the state you’re in or the state you get incorporated in, because you’re going to have different types of asset protection available to you. For instance, in New York, the LLC doesn’t really offer that much asset protection. You’ll be personally protected from liability and from being sued on the business side, but your venue won’t necessarily be considered a protected asset for any type of judgment.
BBM: Okay, so corporate structure is in place. What’s next?
Stoddard: The second thing to obtain—which most people don’t have—is an operating agreement. The one thing that causes a lot of litigation is failure to have an actual operating agreement between the business partners. In the event that something happens to one of the partners, whether its death or some kind of disability, you have to have something that states what happens to that partner’s share and also shows what each person contributed. People often don’t have operating agreements, and it’s a real problem.
What I also recommend, along with the operating agreement, is a buy/sell agreement. The buy/sell addresses the issue of what happens in the event of one of the partners dying, and the estate is compensated for the business. You can run into a situation where Partner A is now partners with Partner B’s family, and never intended to operate the business with Partner B, but Partner B didn’t have a will or any type of estate planning. Now you’ve been working at the bar for ten years, it’s your livelihood, and you’re stuck working with two 18-year-old kids who really don’t have the best intentions for your business. It’s a big issue that I see all too often.
BBM: What’s the final thing an owner needs to address?
Stoddard: The other issue I see is that people do not have correct insurance. In order to open a business in most states, you need liability insurance and you need workers compensation insurance. Workers compensation can be waived in the event that you don’t have any employees, for example, if its owner-operated. Most people don’t realize that liability insurance doesn’t really cover that much; it only covers situations where somebody falls or gets hurt as a result of somebody else’s negligence on your property. Most of the incidents that happen in bars are intentional acts, such as fights. If a bouncer or security officer pushes somebody, that can sometimes be considered an intentional act. A lot of litigation that you have with businesses is from the partners having a dispute, and from the company having a dispute with its insurance carrier.
BBM: What are some important points to keep in mind when it comes to getting the proper insurance?
Stoddard: For liquor liability, you have to ask questions. What does this cover? What does this not cover? I’ve gotten calls from people who have dropped their dram shop coverage and they’re basically stuck. You’re going to get sued, so you’ll have to pay for the defense council yourself. The thing about insurance is that it doesn’t only cover in the event that there’s a loss, it also covers you to be defended on a case, and you can rack up a big amount of attorney fees if you’re paying hourly.
Another thing I see with insurance is that the corporation is set up, and you have the proper insurance, but you have accidents where the damages are above and beyond what your insurance coverage is. Maybe you have the right insurance, but you only have a one- or two million-dollar policy, and there are circumstances where injuries are traumatic. The incident was simply negligence, and negligence is what you have the insurance for, but the damages are beyond that.
BBM: After following these steps, what else can bar owners do before opening the door to customers to protect themselves?Stoddard: Do your homework. I would start off getting to know all state laws, then go down to local laws. You’re going to want to at least become familiar—or hire someone that is familiar—with dealing with any of the particular rules or regulations where you’re opening your business. Don’t jump into laying out money for a business or space until you know that you’re going to be able to open up an actual operation—a bar that’s going to be able to sell liquor.
Next is staffing. Start with employee agreements, which would detail exactly what the bar owner wants or expects from the staff; things about not drinking during work hours, as far as what uniforms somebody should be wearing, the hourly, the tipping, taxing, insurance benefits, etc. You also probably want to have a formal alcohol policy to make sure your staff is aware of what the signs are of somebody being over-served, and hopefully that will prevent any kind of liquor liability issues you’re going to have. And don’t be afraid to call the police necessarily.
BBM: So after all is said and done, what should bar owners always keep in the back of their mind to avoid litigation?
Stoddard: Everything is a potential legal issue. Keep proper corporate records. Corporations sometimes set up multiple corporations, called entity stacking, and what you end up seeing is a co-mingling of funds because people don’t keep the appropriate books. Observe the legal drinking ages. Make sure your equipment is checked regularly, and make sure everyone working with food is trained according to what the code requires and that somebody has a certificate on staff at all times. Every person who walks through your door is a potential liability.