Chapter 8 — Quiz

Twenty-five self-check questions. Answer from memory first; the key is collapsed at the bottom.

Reminder: everything below is structural. The specifics vary by state, county, and city.

Multiple choice

1. An S-corp election is best described as: - (a) a type of entity offering stronger liability protection than an LLC - (b) a federal tax election available to an eligible corporation or LLC - (c) a state licensing category for restaurants with bars - (d) a requirement for any business with more than one owner

2. Forming an LLC protects the owners against: - (a) a personal guarantee signed on the lease - (b) unremitted payroll withholding and sales tax - (c) an ordinary unpaid vendor invoice - (d) their own negligent acts

3. The certificate of occupancy is issued by: - (a) the health authority, after a pre-opening inspection - (b) the state alcohol authority, as a condition of licensure - (c) the building department, after final trade and fire sign-offs - (d) the landlord, on delivery of possession

4. A restaurant holds a certificate of occupancy but not a food service establishment permit. It: - (a) may open and serve food - (b) may occupy the space but not legally operate as a food business - (c) is automatically in violation of its lease - (d) may operate for 30 days under a grace period in all jurisdictions

5. In a quota-limited jurisdiction, a restaurant most commonly obtains a liquor license by: - (a) applying to the state and waiting for issuance - (b) buying an existing license on a secondary market and applying to transfer it - (c) petitioning the municipality for a new allocation - (d) operating under a temporary permit indefinitely

6. When buying a license in a quota market, the single most important structural term is: - (a) the broker's commission rate - (b) whether the seller will finance part of the price - (c) that the escrow releases on regulatory approval rather than on signature - (d) the annual renewal fee

7. The reason a restaurant tenant frequently signs a lease before knowing whether it can serve alcohol is that: - (a) landlords refuse license contingencies as a matter of law - (b) most jurisdictions require control of the premises before an application can be filed - (c) the certificate of occupancy must precede the lease - (d) the license is issued to the landlord, not the tenant

8. Dram shop liability creates two exposures. They are: - (a) civil damages and administrative action against the license - (b) civil damages and increased property premiums - (c) criminal prosecution and loss of the certificate of occupancy - (d) health-code violations and workers' compensation claims

9. A commercial general liability policy will not respond to a dram shop claim because: - (a) the limits are always too low - (b) dram shop claims are uninsurable in most states - (c) CGL policies contain a liquor liability exclusion for businesses that sell or serve alcohol - (d) the claim is brought against the server personally

10. Business interruption coverage generally requires, before it responds: - (a) a government order restricting operations - (b) a covered physical loss to the property - (c) a drop of more than 30% in monthly sales - (d) a police report

11. Workers' compensation premium is rated on: - (a) annual sales - (b) square footage and seat count - (c) payroll, per \$100, by classification code - (d) the number of prior claims only

12. On a restaurant P&L, the workers' compensation premium belongs: - (a) in occupancy - (b) in general and administrative - (c) in other operating, next to general liability - (d) in the labor line as an employee benefit — and therefore inside prime cost

13. A commercial umbrella policy reaches liquor liability claims: - (a) always, because umbrellas sit above everything - (b) only if liquor liability is a scheduled underlying policy - (c) never, because alcohol claims are excluded from all excess coverage - (d) only after the underlying property limit is exhausted

14. ADA compliance for a restaurant is best described as: - (a) a building-code requirement cleared by a municipal inspection - (b) a continuing obligation enforced through private lawsuits and the Department of Justice - (c) applicable only to restaurants with more than fifteen employees - (d) satisfied by a certificate issued at the time of the certificate of occupancy

15. A \$310,000 conversion of a second-generation restaurant space triggers, under the ADA: - (a) nothing, because the building already existed - (b) the new-construction standard for the whole building - (c) the alterations obligation, including a path-of-travel requirement subject to a cost limit - (d) an exemption, because restaurants are not places of public accommodation

16. The characteristic first contact in an ADA claim against a restaurant is: - (a) a citation from the building department - (b) a health-department re-inspection - (c) a demand letter from an attorney on behalf of a named individual - (d) a notice from the state alcohol authority

17. An "evergreen" clause in a vendor contract: - (a) guarantees the price for the life of the agreement - (b) automatically extends the term unless notice is given within a defined window - (c) permits either party to cancel at any time - (d) obliges the vendor to hold insurance

18. A certificate of insurance is: - (a) the policy itself - (b) evidence that coverage is in force, which does not amend the policy - (c) a guarantee of payment on a claim - (d) required only for hood-cleaning contractors

Short answer

19. State the formula for the revenue at risk when a liquor license fails, and apply it to a restaurant at \$1,550,000 of sales, a 28% beverage mix, and a 22% pour cost.

20. Name three things a business entity does not protect its owners against, and name the document or behavior that creates each exposure.

21. A licensed premises has a "boundary." Explain what that means and give one practical consequence for a restaurant with sidewalk seating.

22. Explain why an operator can be more exposed by an administrative suspension than by a civil claim of the same underlying facts.

23. A restaurant insures \$540,000 of tenant improvements, equipment, and contents whose actual replacement value is \$720,000, under an 80% coinsurance clause with a \$5,000 deductible. Compute the payment on a \$100,000 loss.

24. Name the four "gates" in the sequence from lease to open door, in order, and say which one is a single document.

25. State one reason each why the following belong on the same one-page calendar: a liquor license renewal, an insurance policy expiration, a linen-contract notice window, and Chapter 6's renewal-option deadline.

Answer key — try all twenty-five first **1.** (b) — A tax election, not an entity type. It says nothing about liability. **2.** (c) — Ordinary business obligations. It does not reach a personal guarantee, trust-fund taxes, or your own negligent acts. **3.** (c) — The building department, after every trade and the fire marshal sign off. **4.** (b) — Two different authorities, two different permissions. You can be lawfully in the building and legally unable to cook. **5.** (b) — In a quota market you are buying, then applying to transfer. **6.** (c) — Escrow releasing on approval rather than signature. Otherwise a denied transfer is a total loss. **7.** (b) — Proof of premises control is typically required to file, which is why Tab 6 in Figure 8.2 is the trap. **8.** (a) — Civil damages, which insurance answers, and administrative action against the license, which no policy buys back. **9.** (c) — The liquor liability exclusion. It is standard, and it is why the separate coverage exists. **10.** (b) — A covered physical loss, which is why closure-order claims without physical damage largely failed. **11.** (c) — Per \$100 of payroll by class code, adjusted by an experience modifier, and audited after year end. **12.** (d) — An employee benefit inside the labor line, which places it inside prime cost. **13.** (b) — An umbrella only reaches what it schedules. Confirm liquor liability is listed, in writing. **14.** (b) — A civil rights statute, not a building code. No inspector clears you. **15.** (c) — Alterations, plus the path of travel to the altered area, subject to a proportionality limit on cost. **16.** (c) — A demand letter, because Title III is enforced privately. **17.** (b) — And the notice window is usually narrow, which is why it goes on the calendar the day you sign. **18.** (b) — Evidence, not the policy, and it does not amend the policy. When it matters, read the policy. **19.** Beverage revenue = sales × beverage mix; contribution at risk = beverage revenue × (1 − pour cost). Here: \$1,550,000 × 0.28 = **\$434,000**; × (1 − 0.22) = **\$338,520** a year, or **\$6,510** a week. Note this is contribution *before* any loss of food covers that came for the bar. **20.** Any three of: **a personal guarantee** (the lease guaranty and the note guaranty); **your own negligent conduct** (your acts, not the business's obligations); **trust-fund taxes** — unremitted payroll withholding and sales tax, where responsible individuals are commonly personally liable; and **itself, if ignored** — commingling, no separate account, thin capitalization, and contracts signed in a personal name. **21.** The license authorizes service within a defined, mapped area shown on the application plan. Practical consequence: sidewalk seating must be inside that boundary — often requiring a physical barrier and a specific approval — or serving alcohol there is a license violation, not a paperwork slip. **22.** Because liquor liability insurance can respond to the civil claim up to its limits, while no policy restores a suspended license. A suspension takes the beverage contribution *and* the food covers that come with the bar, for as many days as it runs, and it leaves a record on the licensee. **23.** Required limit = \$720,000 × 0.80 = **\$576,000**. Payment = (\$540,000 ÷ \$576,000) × \$100,000 = **\$93,750**; less the \$5,000 deductible = **\$88,750**. The shortfall is **\$11,250**. **24.** May you build (zoning, plan review, permit) → may you occupy (**the certificate of occupancy**, the single document) → may you operate (the permit stack, including the liquor license) → the health pre-opening inspection. Then you open. **25.** All four are dated obligations whose consequence for missing them is out of all proportion to their size, all four fire on dates nobody will otherwise remember, and all four are cheap to handle early and expensive to handle late. One page, one owner, first Monday of the month.