What Type of Legal Business Entity Should I Assign To My Brewery, Brewpub, or Cidery?
When selecting the type legal entity you plan to assign to your brewery, there are a variety of things to consider. These are broken down in the following rules we recommend following.*
Rule #1: Never operate your brewery as a sole proprietorship
First, and foremost, you should never start a brewery, brewpub, cidery, or any other type of business that serves/produces alcohol as a sole proprietor. Businesses that are in the alcohol industry are prone to more litigation and lawsuits than the average business. Also, being a manufacturer that deals with many heavy objects, high voltage and/or heat, and other dangerous workplace hazards can open up the company to employee injury lawsuits. With that being the case, if you plan to jump into the brewing business, partnering with a good insurance company should be considered a normal cost of doing business and standard operating procedure.
Rule #2: Limit Your Liability
One of the biggest issues with sole proprietorships is there's no limits to your personal liability. That's why so many entrepreneurs tend to start their business as an LLC. A Limited Liability Company is a corporate structure that does just that - it limits the liability of its owners. The owners of an LLC (referred to as members) cannot be held responsible for the company's debts or liabilities, yet profits from the company pass through to the owners in a fashion similar to that of a sole proprietorship. Thus, the owners are afforded an added level of protection without sacrificing a significant amount of capital to do so (typically, just the LLC fees and annual report).
Filing an LLC is the type of legal entity we recommend for brewing operations with less than 10 owners. Filing for a Limited Liability Company for your brewery is also quick, cost effective, and easy - we recommend using the online service Legal Zoom.
Rule #3: Consider Your Tax Footprint
Not all states are created equal, and the laws regarding the various business entity types will vary from state to state. Some can come with some pretty dramatic fees and/or taxes. For instance, in North Carolina, the cost to file for your LLC is $125, and then you're responsible for filing an annual report on your LLC (a simple 1 page document) for an additional $200 each year. Across the country in California, it's a different story. What appears to be a fairly reasonable fee of $85 to file for your LLC and provide a $20 informational report quickly balloons with the addition of the annual California LLC fee. This fee starts at $800, and based on your breweries total sales can quickly balloon to 4 or even 5 figures. So when you're considering what type of legal entity to setup for your brewery, it would also be a good idea to decide where you'll be filing your LLC.
Depending on the number of owners, your preferences for taking on liabilities and protecting your personal assets, and the state/county/city fees and taxes on the business type should all play into your decision when selecting a business structure. In addition to the Sole Proprietorship and Limited Liability Company covered in this article, you may also want to consider forming a Cooperative, Corporation, Partnership, or S Corporation. The majority of new breweries will likely fall under the LLC structure; however, if you would like to learn more about the other legal business entities, you can visit the Small Business Administration's website which provides an excellent overview of the topic.
*This information is a reflection of our opinion and should not be construed as legal advice. Use of the information on this site and/or from this thread should be done so at the reader's own risk.