Starting a Brewery or Distillery: Legal Entity Selection
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 provision.
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.