Starting any new brewery requires careful planning by the founders. Put simply, breweries that do not have solid and forward-thinking plans will not succeed. The ability to make a great end product is, by itself, not enough. To help you get started, I plan to publish a checklist of things related to the law you should do when you are starting your brewery. This is the second article of this series, which discusses selecting a business structure.
Step 2: Selecting a Business Structure
The next thing you should do when you start a new brewery is to select the business structure that best fits your brewery’s needs. Each of the business structures carries with it legal and tax ramifications. Every state governs the types of business structures available within its borders. In most states, the business structure types available are sole proprietorships, partnerships, corporations, and limited liability companies (“LLC’s”). Selecting the right structure for your brewery is a decision that involves several factors and should be made with the assistance of an attorney or accountant.
Sole proprietorships are only available where the brewery owner is an individual. Typically, a sole proprietor does not need to register with a state authority. This type of organization does not offer any protection from liability (meaning the owner will be personally accountable for the actions of the company). Brewery owners encounter financial liability when they take on loans or other credit and product liability when they offer and sell their products. All income earned by a sole proprietorship is paid as income of the sole proprietor.
Partnerships arise when two or more people join together to start a brewery without forming an LLC or corporation. Partnerships can be formed even where the parties do not intend to enter into a partnership. The partners share the authority to make decisions regarding the business and share joint liability for the debts and obligations of the business. Income of the partnership passes through the business and is treated as income of the partners.
Corporations are they type of entity that require the most upkeep and compliance. In order to start a corporation, the founders must write and submit (to the appropriate state authority) Articles of Incorporation, write and adopt by-laws, and file annual reports. Individuals forming a corporation are able to vest management powers in directors, operations powers in officers, and issue stocks to shareholders. Issuing stocks allows corporations the benefit of being able to raise additional outside capital. Corporations also serve the purpose of shielding individuals from personal liability. Perhaps the biggest downside to this business type is that corporations are said to be subject to “double taxation,” in that corporations pay tax on income as well as distributions. This downside can sometimes be avoided where the corporation qualifies as an S Corporation. S Corporations are a special type of entity recognized by the IRS that allow income to bypass the business entity and be distributed to shareholders directly.
Limited Liability Companies
Many newly formed breweries elect to structure themselves as an LLC. Owner’s of the LLC are called members. The members must draft and submit articles of organization (to the relevant state authority). Annual reports are, generally, not required of LLC’s. LLC’s shield members from personal liability. LLC’s generally can elect how the IRS will tax it. Individuals can form single-member LLC’s, gaining the limited liability benefits inherent in an LLC and may also elect to be taxed either as a sole-proprietorship or an S-corporation.
Regardless of which type of entity you elect to create, you will likely need an Federal Employee Identification Number (EIN). This can be obtained from the IRS’s website. This number will be useful when you try to open a bank account for your business and file taxes. If you have started an LLC and have elected to be taxed as a S-Corporation (which gives some companies a tax advantage), you will have to send a form to the IRS indicating such.