In this ten-part blog series, I will explore the ten steps that you should take to start-up a brewery of your own in Maryland. If you follow these ten simple steps, you will be able to start-up with a great foundation for success. In Step 1, we explored creating a business plan for your new brewery. In this article, we will explore the second step: forming a business entity.

There are several types of entities that one may elect to use in connection with its operation of a brewery, from sole proprietorships and partnerships to entities which offer limited liability protection, such as corporations and limited liability companies. There is no “one size fits all” entity and each has advantages and disadvantages.  

For purposes of this article I will focus on limited liability entities, rather than sole proprietorships and partnerships. Operating as a sole proprietorship or a partnership, generally, and even more so in the alcoholic beverage industry, is often a dangerous proposition that should be avoided at all costs because your personal assets (i.e. home, car, bank accounts) could be exposed to liabilities incurred by the business. Potential liabilities are everywhere in this industry, from the products you produce and sell, to the debts and obligations you take on, to the employment and payroll decisions you make. Additional liabilities may be incurred if you invite people to your business site for tours and tastings. Thus, operating your business through a limited liability entity is highly recommended.

When “start-ups” and emerging businesses begin the entity selection process, they should focus, initially, on three criteria:

1. Liability Protection
2. Taxation
3. Ease and cost of Governance/Maintenance

Of course, there are other considerations, some of which are particularly important for alcoholic beverage businesses, such as which entity or entities are more attractive to potential investors. These additional factors, though, should be set aside for later when the client has already narrowed the possible entity types down to a couple based on the above factors.

Below are listed the most frequently selected types of limited liability entities, along with some of the more important features of each. However, one should not underestimate the importance of finding a knowledgeable attorney and accountant with whom to consult before making such a vital decision, as everyone’s situations are unique.

C Corporations:

• Liability Protection: C Corporations offer limited liability protection, which is important to shield your personal assets from liabilities incurred by your business.
• Taxation: The major disadvantage for C Corporations is that they are “double taxed”. This means that for each dollar of revenue earned by the business, it is taxed once at the corporate level, at the corporation’s tax rate, and then again when that dollar is distributed to the corporation’s shareholders, at the individual shareholder’s tax rate. Ouch!
• Ease of Governance: Another drawback of using a C Corporation is that there are many strict maintenance requirements. Most often a formal corporate board and officers must be put in place, annual meetings must be held and meeting minutes must be recorded and maintained. For smaller businesses, these rigorous requirements are often found to be overly burdensome.
• Other: C Corporations are still viewed by many venture capitalists and “angel” investors as the most trusted type of entity, due to the fact that they have been used for a long time. For purposes of attracting investors, this may be the best option for you.

S Corporations:

• Liability Protection: S Corporations offer the same limited liability protection offered by C Corporations.
• Taxation: S Corporations are “pass through” entities whose revenues are not taxed at both the corporate and shareholder level, but instead “pass through” straight to the shareholders and are only taxed at the shareholder level. This can be a meaningful advantage.
• Ease of Governance: S Corporations are standard corporations that elect a special tax status with the IRS. Accordingly, the governance and maintenance requirements are similar to those of a C Corporation, which can prove to be burdensome.
• Other: S Corporations can also be beneficial if you want the flexibility to set salaries for employees/owners to minimize FICA and FUTA taxes. There are some drawbacks, though, such as the inability to have multiple classes of shareholders and a limitation on the total number of shareholders that can be in the S corporation.

Limited Liability Company:

• Liability Protection: Limited liability companies offer the same limited liability protection offered by C Corporations and S Corporations.
• Taxation: LLCs offer the flexibility to be taxed in a variety of ways. By default, a single member LLC is taxed as a disregarded entity (like a sole proprietorship) and a multi-member LLC is taxed as a partnership. However, LLCs can also “check the box” and elect to be taxed as a C Corporation or an S Corporation, if that is more beneficial for the business.
• Ease of Governance: LLCs offer great flexibility with respect to governance as well. It is recommended that LLC members have an operating agreement in place (an operating agreement is much like a partnership agreement). There is often no requirement that LLCs hold annual meetings, maintain a formal board and/or officer structure or maintain regular meeting minutes. That said, LLCs can be set up with formal boards and use an officer structure, if the members so choose; and, thus, LLCs can look just like a corporation if that is preferred.  It is the flexibility and ease of governance that makes LLCs so attractive.
• Other: LLCs are relatively new entities and, for that reason, are not often seen in the same light as the more traditional C Corporation by many venture capitalists, although this thinking is waning. The flexibility of the LLC often makes it the preferred choice of many start-ups and emerging businesses.

As can be seen, when considering the type of entity form to utilize it is recommended that a brewery that is just starting-up or emerging should work closely with a knowledgeable attorney and accountant. Decisions made at the beginning of the business’ existence, which are often the most impactful decisions to be made, need to be made correctly. Making the correct decisions early will establish a strong foundation for success later!

Opinions and conclusions in this post are solely those of the author unless otherwise indicated. The information contained in this blog is general in nature and is not offered and cannot be considered as legal advice for any particular situation. The author has provided the links referenced above for information purposes only and by doing so, does not adopt or incorporate the contents. Any federal tax advice provided in this communication is not intended or written by the author to be used, and cannot be used by the recipient, for the purpose of avoiding penalties which may be imposed on the recipient by the IRS. Please contact the author if you would like to receive written advice in a format which complies with IRS rules and may be relied upon to avoid penalties.

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