Brewery Law 101: Starting a Brewery: Which Entity Should I Choose?
This is our first post in our Brewery Law 101 series. Starting a brewery is fun and exciting, especially when you get to the beer brewing part, but first you should take some time to select the right entity. Selecting the best entity for a brewery or distillery involves a number of considerations, including (1) taxation, (2) owner liability, (3) governance, (4) capital structure, and (5) potential exit strategies, to name a few.
Below is a primer on some of the various entities that are available for Washington breweries. I have highlighted some of the main features of the primary entity options. You can find a more robust analysis of each entity by clicking on the hyper-linked terms.
The Sole Proprietorship
A sole proprietorship is a business owned and controlled by a single individual or a married couple. A sole proprietorship is easy to form and operate (just start doing business without a partner, and you are a sole proprietor), but sole proprietors are personally liable for debts and claims against their businesses. Sole proprietors must report their business income and expenses, along with other items, on their individual tax returns.
The General Partnership
A general partnership is an association of two or more individuals who carry on as co-owners a business for a profit. No formal paperwork is required to initiate a general partnership. In fact, general partnerships are sometimes formed accidentally or without the intent of the general partners. Each partner is an agent of the firm for purposes of its business, and the act of each partner in apparently carrying on the partnership business generally binds the partnership. Each partner has a right to share the profits and losses and a right to participate in the management of the business. Additionally, each general partner is jointly and severally liable for all debts and obligations of the partnership. Formal terms of the partnership, if any, are usually contained in a written partnership agreement.
The Limited Partnership
A limited partnership has both general and limited partners. The general partners participate in management and share the profits and losses. General partners are jointly and severally liable for all debts and obligations of the partnership. One of the key differences between this form of entity and a general partnership is that the limited partners generally do not participate in management and are only liable to the extent of their investment (or contribution) in the partnership. Unlike a general partnership, the creation of a limited partnership requires the execution and filing of a certificate of limited partnership with the Secretary of State.
A limited liability company (LLC) is an unincorporated entity in which one or more individuals called “members” have limited liability for the enterprise’s debts and claims even if they participate in management. Members of an LLC have great flexibility in structuring the management of their venture through the LLC’s governing document, known as an “operating agreement.”
A corporation is a legal entity formed under state law. Corporations allow for the split of management and ownership – shareholders own the corporation, but senior management controls the day to day operations. Neither managers nor shareholders are generally personally liable for the debts of a corporation. Corporations are generally more burdensome to operate and come with a “double tax” burden. However, the corporate structure is often ideal for raising capital, and the corporate form has long been the most commonly used legal form for operating virtually all publicly held businesses. Variations of corporations include S Corporations and non-profit corporations. S corporations are subject to a number of restrictions, but are taxed like partnerships. A nonprofit corporation is a legal entity typically run to further some public interest, rather than strictly for profit.
So which entity is right for your brewery or distillery? It depends, but it is worth noting that you should always elect to form a limited liability entity in order to avoid personal liability for claims against your business. Looking at local Seattle breweries’ entity choices, we find that Fremont Brewing Company is a LLC, Odin Brewing is a LLC, and Georgetown Brewing is a corporation.
One question we always ask new business owners is “do you plan on raising capital from investors?” If the answer is “yes,” then often it makes sense to form a corporation, as investors typically prefer to invest in C-Corporations. That said, many breweries are bootstrapped by their founders, and in that case, an LLC likely makes sense because of its flexibility, pass through taxation, and simplified governance. However, each business and its owners are different, so it is always a good idea to ensure you make a thoughtful entity choice.
If you’re starting a brewery or distillery and you’d like to learn more about which entity is best for your business, please feel free to contact us today.