A primary consideration when starting a new business, including a new brewery,
distillery, etc., is what type of legal entity should you establish? LLC?
Corporation? There are several different entity types from which to choose,
each with its own unique characteristics and benefits. Below, please find
some high-level differences between the available entity types, as well
as some concerns specific to the brewing industry.
A corporation is an entity governed under state law and created with the
filing of the Articles of Incorporation. A corporation is owned by its
shareholders, who elect the entity’s Board of Directors. The Board
of Directors then oversees the management of corporate affairs, but leaves
the day-to-day operations of the entity to the corporation’s officers
and directors, who the Board of Directors elects. In a closely-held corporation,
the corporation’s shareholders, officers, and directors may be the
same individuals. The corporation is controlled by its bylaws, shareholder
control agreements, and corporate resolutions.
Depending on the type of corporation established, the entity may or may
not be taxed at the corporate level. A C-Corp pays taxes first at the
entity level, and second at the shareholder level when distributions are
made. An S-Corp, however, is a pass-through entity; no taxes are assessed
at the entity level but are instead paid only once at the shareholder level.
A corporation affords its shareholders limited liability, meaning shareholders
are not personally liable for the debts and obligations of the corporation,
provided corporate formalities are maintained, including holding shareholder
and director meetings, filing annual reports, issuing stock, and adopting
and adhering to corporate bylaws. Instead, shareholders are only liable
to the extent of their capital contributions to the corporation.
In addition to differential tax treatment, S-Corps and C-Corps have different
restrictions on ownership, including the number of shareholders, whether
shareholders can be individuals or entities, citizenship requirements,
and classes of stock.
When forming a corporation, you will need to file the necessary documents
with the Secretary of State, as well as will need bylaws, possibly a shareholder
control agreement, and other formal corporate documents in order to maintain
corporate formalities and prevent piercing of the corporate veil.
Limited Liability Company (LLC)
A limited liability company (“LLC”) is an entity governed under
state law and created with the filing of the Articles of Organization.
As opposed to corporations, an LLC is owned by one or more “members,”
who may also manage the entity and perform the day-to-day operations of
the entity. The entity is formed when the members contribute either capital
in the form of money or property, or services to the entity. The LLC and
the members’ relationships to it and to one another are governed
by an Operating Agreement.
One substantial benefit of the LLC entity type is its pass-through nature
for tax purposes. Whereas a corporation may be taxed both at the entity
level and when profits are distributed to the corporation’s shareholders,
the LLC is not itself taxed. The LLC’s profits are instead taxed
only once at the member level.
Further, an LLC affords its members limited liability, meaning the members
are only liable for the LLC’s debts and obligations to the extent
of their initial capital contributions, provided corporate formalities
are maintained. No personal liability attaches.
When forming an LLC, you will need to file the necessary documents with
the Secretary of State, as well as will need an Operating Agreement, possibly
a buy/sell agreement, and other formal corporate documents in order to
maintain corporate formalities, prevent piercing of the corporate veil,
and plan for eventualities such as departure of a member of the LLC.
Some Brewery-Specific Considerations
When drafting the governing documents for either a corporation or an LLC
specific to the brewing industry, there are certain additional considerations
you will want to ensure are addressed. For example, you will want to require
all proposed members, shareholders, officers, and directors to pass the
necessary Alcohol and Tobacco Tax and Trade Bureau background checks.
Further, you will want to include provisions requiring all related individuals
to comply with State and local mandates, including necessary background
checks and liquor licensure. If a member, shareholder, officer or director
fails to meet such requirements, you will want your governing documents
to provide an avenue to remove the individual, such as with a forced buyout
If you are considering opening your own business, including a new brewery,
and you have questions regarding the available entity types, the filings
necessary, or governing documents, contracts and agreements needed to
establish and maintain your business, we can help. Check back on our website
as we are publishing a series of blog posts discussing the various aspects
to consider and address when opening a new brewery.
Moreover, when you are ready, please contact us at 303-678-0560 to further
discuss how we can help you open your successful new brewery.