When the Israelites wandered in the desert following the Exodus and until they entered the Promised Land, G‑d provided them daily with heavenly manna. In order to enable the Jews to observe Shabbat (and not have to carry and prepare the manna on the Day of Rest), G‑d provided them with a double portion on Friday. To commemorate this miracle, the Sages instituted that we break bread over two complete loaves at the start of every Shabbat meal. These two loaves are known as Lechem Mishneh.
(The Arizal would use twelve loaves for the Lechem Mishneh of his three Shabbat meals, corresponding to the twelve showbreads that were consumed by the priests every Shabbat in the Holy Temple.)
Bread is man's staple food, so the Sages instituted that significant meals should include breadThis rabbinic enactment applies to the Friday night meal and the meal eaten on the day of Shabbat. According to most opinions, one should also have two loaves at the third meal (as well as at any other [optional] meal that one may enjoy during the course of Shabbat). Others say that since in the desert the Israelites would have only one portion of manna left for the third and final meal of the day, we need not commemorate the additional portion at that meal.
The obligation to take Lechem Mishneh applies to holidays as well, since the manna did not fall on the holidays. No Lechem Mishneh is required on Chol Hamoed, Rosh Chodesh, Purim, the eve of Yom Kippur or on any other (semi) holiday when work is not proscribed.
What Type of Loaves?
The loaves must each be at least the size of an olive, and made of grain flour (wheat, barley, spelt, rye or oat) so that the blessing recited is Hamotzie (the blessing on bread)—because the Torah refers to manna as bread. In addition, bread is man's staple food, so the Sages instituted that significant meals should include bread. Another reason for the bread requirement is to enable the mentioning of Shabbat in the Grace after Meals.
If a majority of the liquid ingredients is not water (e.g., eggs, oil, juice, honey or liquefied sugar), then the bread is considered "cake," and the appropriate blessing is Mezonot. One should not use such a loaf for Lechem Mishneh unless he plans on eating a significant amount of this bread during the meal (approximately eight ounces), and intends to be satiated by the bread and the other dishes served during the meal.
Ashkenazim can use regular (not egg) matzahs for Lechem Mishneh. According to Sephardic custom, the blessing on matzah (aside for on Passover) is Mezonot. Those following this tradition should not use matzah unless they intend to eat the amount detailed above.
How Complete is Complete?
If a loaf is missing a small amount, some say that it is still considered completeThe two loaves must be complete and unsliced. If a loaf is missing a small amount (up to 1/48th), some say that it is still considered complete, others disagree. If a loaf breaks apart, some say it may still be used if it can be held together internally (e.g., by a stick) in a manner that makes it appear complete.
If two loaves bake together in an oven and become attached, they may be broken apart and still count as two loaves. In such a case, one should cut the loaf from the side where it appears complete (i.e., where it wasn't stuck together).
A broken loaf can be "repaired" if it is put back into the oven (before Shabbat) and re-baked. (On a similar note, I heard in the name of Rabbi Avraham Hirsh Cohen, of blessed memory, from Jerusalem that if a part of a matzah breaks off, the matzah can be rendered complete simply by passing a match along the broken edge. This may be done on a holiday as well—if the match is lit from a preexisting flame and is not extinguished afterwards, but allowed to go out by itself.)
The loaves should be covered during kiddush. This is reminiscent of the manna, which was covered, for protection, by a layer of dew. (The tablecloth beneath is reminiscent of the layer of dew that was beneath the manna.)
In addition, the blessing on bread usually precedes the blessing on wine, and here, for the sake of kiddush, this order is reversed. So we cover the bread during the kiddush, as if the challah wasn't present. Also, the covering delivers the message that the meal only begins after, and because of, the (the sanctity of Shabbat expressed in the) kiddush.
Some say that the challahs should remain covered until after the Hamotzie blessing.
The Proper Way to Hold the Loaves
There are various opinions and customs with regards to the proper way to hold the Lechem Mishneh during the Hamotzie blessing.
It is best to have all ten fingers touching the loaves while reciting the blessingHalachically it is preferable to hold the loaf that one is planning to break and eat above the other loaf. This follows the principle that one may not pass over one mitzvah (object) in favor of another mitzvah (object). For kabbalistic reasons, however, on Friday night one should break the loaf that is the lower of the two. One who wishes to satisfy both opinions should hold the lower loaf a bit closer to himself while reciting the blessing.
This all applies to the Friday night meal. On Shabbat day (as well as on holiday nights that are not also Friday night), one simply uses the upper loaf.
The Chabad custom is to hold the two loaves side by side on Friday night while saying the blessing, then to break and eat from the one on the right. On Shabbat day one holds them side by side with the right one tilted slightly over the left one while saying the blessing, and then breaks and eats from the one on the right.
It is best to have all ten fingers touching the loaves while reciting the blessing.
Marking the Bread
Normally we cut the bread before reciting the blessing so we shouldn't have to interrupt between the blessing and the eating. On Shabbat, however, we cannot cut the bread before the blessing because there is a mitzvah to make a blessing on two complete loaves.
So instead we make a mark on the loaf with the knife, in the area where one plans to make the first cut (somewhere on the middle part of the loaf). This way we are minimizing the time between the blessing and consumption, for there's no need now to think where to start slicing. After the blessing, one should make the first cut in the general area of the marking, but need not seek out the exact spot.
Usually it's the host who recites the blessing aloud and breaks the bread, though if he wishes, he may honor someone else to do this. It is customary to wait for all the assembled to wash their hands before reciting the blessing.
All the assembled listen to the blessing and respond "Amen." If they have not talked before they receive their bread, they may eat without saying their own blessing—as they have fulfilled their obligation by hearing the blessing from the host. If they did talk in the interim, they must recite their own blessing. The Chabad custom is for the assembled to always make their own blessings.
Cutting and Eating
It is customary to slice large pieces of challah for each of the assembledIt is customary to slice large pieces of challah for each of the assembled, to show that the Shabbat meal is very precious to us.
If the assembled are fulfilling their obligation to recite the blessing by hearing it from the host (see above), the host should take at least a small bite before cutting the bread for the rest.
Although the common custom is to cut and consume only one of the loaves (unless more is needed), there are opinions that one should cut and eat from both of the loaves.
When passing bread to another, one should not put it directly in the hands of the other person (as this is a sign of mourning). Rather it should be placed on the table from where the other person takes it.
One should eat at least an amount of bread the size of an olive (approximately one ounce) within four to seven minutes (known in halachic parlance as "k'dei achilat peras"). It is preferable to eat an additional olive size piece immediately after the first.
It is customary – both on Shabbat and during the week – to dip bread in salt after reciting the Hamotzie blessing. This reminds us that the table we eat on is like the holy Altar on which the priests used to salt all sacrifices. The salt also serves as protection, as it "reminds" G‑d of the everlasting "salt covenant" He made with the Jewish people. For kabbalistic reasons, it is customary to dip the bread in salt three times.
Step By Step
1) Keep the loaves covered until the recitation of the blessing.
2) After all of the assembled have washed their hands and are ready, mark the bread with the knife.
3) Hold the breads side by side and recite the blessing.
4) Cut a piece from the center of the loaf and eat a bit—after dipping it in salt.
5) Cut the bread up for the assembled to eat and pass around for everyone. (Each piece should first be dipped in salt.)