Choosing the Right Corporate Structure
Welcome to Lawyers on Tap, a blog dedicated to keeping you up to date with the legal issues facing the craft beverage industry. As this is the first blog post, let me open by saying, hello from Verrill Dana. Our firm has been assisting those in the craft beverage industry for several decades. Over that time we have developed considerable experience dealing with the particular challenges facing the industry. In this blog we will hope to provide you with information on trends, issues, and interesting news related to the legal side of operating in this complex sector. Given that this is our first post here on the blog, it seems fitting to cover the first issue that faces every brewery, distillery, or winery, choosing a business structure.
Choosing a Business Structure
Choosing how to structure your business is one of the first major choices you are faced with when opening a craft beverage company. The number of options available and the potential long-term ramifications of this decision make it important to spend time weighing the various options available. Choosing the right business structure involves a number of considerations, including limiting liability, taxes, investment and capital structure, and governance. Given the importance and complexity of this choice, it is advisable to discuss this step with an attorney, accountant, or other business consulting professional.
A sole proprietorship is the simplest form of business structure, often not requiring any filings with state or local agencies. However, this simplicity comes at a cost. This type of business structure does not offer any protection from liability, meaning that the individual sole proprietor assumes all debts and liabilities incurred by the business. All income earned by a sole proprietorship is paid as income of the sole proprietor.
A partnership is the default form of ownership where two or more owners get together to operate a business. A general partnership does not require any formal filings with a state or local agency, and can exist even without a formal written agreement between the two parties. In a partnership, each partner has the authority to act for the partnership as a whole, and each partner shares responsibility for the debts and other liabilities the partnership incurs. The income of the partnership is not taxed at the partnership level, but rather passes through to the partners.
A corporation is a legal entity formed under state law by filing articles of incorporation, along with other supporting documents, with the appropriate state authority. Forming and maintaining a corporation requires a fair bit of administrative work. However, unlike sole proprietorships or partnerships, the shareholders of a corporation are generally not personally liable for the debts and obligations incurred by the corporation. Furthermore, corporations, through the issuance of stock, are more readily able to raise additional outside capital. A further drawback with the corporate structure is so-called “double taxation” which means that a corporation pays tax on its income, and the shareholders of the corporation pay taxes on any distributions they receive. This “double taxation” can be avoided if the corporation qualifies as an S-Corporation, a special corporate entity recognized by the IRS that allows income to bypass the business entity and be taxed solely at the distribution stage.
Limited Liability Companies
Probably the most popular business entity choice for new craft beverage makers is the limited liability company (“LLC”). An LLC offers many of the advantages of corporation, including limited liability and flexibility in management and capital structure. However, the main benefit of an LLC over a corporation is that an LLC may elect to be taxed as a partnership, thereby avoiding the “double taxation” issue faced by most corporations. Finally, individuals can form single-member LLC’s, providing individuals with the limited liability benefits missing in a sole proprietorship. Similarly to a corporation, an LLC must file certain papers with the state and should develop an operating agreement to control the management and economics of the LLC.