It is haraam to set up discos and work in them, as it is also haraam to sell alcohol. The wealth that is earned from that is evil, haraam earnings, because when Allah forbids a thing, He also forbids its price. The Prophet (blessings and peace of Allah be upon him) stated that alcohol is cursed, as are the one who sells it, the one who drinks it and the one who carries it, as it says in the hadeeth narrated by Abu Dawood (3674) and Ibn Maajah (3380). It was narrated that Ibn ‘Umar (may Allah be pleased with him) said: The Messenger of Allaah (blessings and peace of Allah be upon him) said: “Allaah has cursed khamr and the one who drinks it, the one who pours it, the one who sells it, the one who buys it, the one who squeezes it, the one for whom it is squeezed, the one who carries it and the one to whom it is carried.”
Classed as saheeh by al-Albaani in Saheeh Abi Dawood.
It was also narrated by at-Tirmidhi (1295) from Anas ibn Maalik (may Allah be pleased with him) who said: The Messenger of Allaah (peace and blessings of Allaah be upon him) cursed ten with regard to wine: the one who squeezes (the grapes etc), the one who asks for it to be squeezed, the one who drinks it, the one who carries it, the one to whom it is carried, the one who pours it, the one who sells it and consumes its price, the one who buys it and the one for whom it is bought.
What is required of one who has fallen into any of that is to repent to Allah, may He be exalted, gave up the sin, regret what has happened in the past and resolve never to go back to it. As for the wealth that he acquired by haraam means, whatever he has consumed or spent, he does not have to do anything about it. Whatever he still has with him, he had to get rid of it according to the most correct of the scholarly opinions. So he should spend it on the poor and needy, and other charitable good causes.
If he is in need of the money, then he may take of it whatever will suffice him, and get rid of the rest. There is nothing wrong with him taking some of it as capital for business or permissible work.
Shaykh al-Islam Ibn Taymiyah (may Allah have mercy on him) said: If this prostitute and wine maker repent and they are poor, it is permissible to give them as much of this money as they need. If he is able to engage in trade or to do a craft such as weaving and spinning, he may be given some of the money as capital.
End quote from Majmoo‘ al-Fataawa, 29/308
We praise Allah, may He be exalted, for having guided your brother to think of repentance, and we ask Him, may He be glorified, to accept it from him and to forgive and pardon him.
It must be pointed out that what he is required to do is to get rid of the haraam wealth only, and not all the wealth that your brother has earned. No doubt the two restaurants served some halaal foods, as well as haraam things such as alcohol. What he has to do is to work out how much of the profits came from haraam things, and get rid of that money. As for the profits that came from selling halaal foods, that money is permissible for him and there is nothing wrong with him benefiting from it; he does not have to get rid of it.
As for your questions, the answers to them are as follows:
With regard to the money that your mother and others took and benefited from it, they do not have to do anything about it. The same applies to whatever they still have of it; they may benefit from it. The basic principle concerning that is that money that is haraam because of the way in which it was acquired is haraam for the one who acquired it only. As for the one who took it from him in a permissible way, such as if he gave it as a gift or spent it on his family, and the like, it is permissible for him. So there is no blame on your family for what they have taken of this money.
Similarly there is no blame on the one who took a loan from it, because the sin has to do with the one who acquired the money in a haraam way only; there is no sin on the one who borrowed it from him.
Partnership with a person in whose wealth there is any haraam element is valid, although it is better not to get involved in it, and any profits resulting from this venture are halaal in sha Allah. But your brother has to get rid of the haraam wealth, as stated above.
Among the ways of getting rid of haraam wealth is to give it to a poor person who needs to get married or who needs accommodation, or the one who will set up a business from which he will spend on himself, and the like. It is permissible to put this money into a fund from which needy people may borrow, but the wealth cannot come back to your brother and he cannot regain possession of it, because he is obliged to get rid of it, as stated above.
Whatever your brother has given to the poor of maintenance and regular income is something praiseworthy and he will have a reward commensurate with the proportion of halaal wealth in what he gave. Perhaps these good deeds were a cause of his having been guided and it may be the result of sincere prayers by those needy people. He should set aside some of this money that he has to get rid of, and give it to these poor people, and he will be rewarded for doing so.
We ask Allah to help and guide us and you, and to make us all steadfast.
And Allah knows best.