How to Choose the Correct Type of Entity For your beverage business

For the dreamers, entrepreneurs, and the lovers of libations, if you have made it this far in opening your own distillery, brewery, or winery - congratulations! One of the first (of many) boxes to tick is figuring out what type of business you’d like to create. There are plenty of options available to you–you could start doing business today as a sole proprietor, or if you are working with a couple of friends or family members, a partnership is relatively easy to get up and running. But, if you plan to enter the alcohol space in any capacity, it is vital that you select an entity type that protects you to the maximum extent possible. In this post, we’ll give you some background on the types of entities we form most frequently for our clients–Limited Liability Companies (LLC) and Corporations–and explain how you can use either of these to safely launch your alcohol business.  

Corporation

A corporation is one of the longest-standing entity types, and for good reason. From the standpoint of liability or asset protection, it’s hard to do much better.  

It is a legal entity that protects its shareholders or owners from liability by separation. It offers a lot of protection for the company owners, but corporations are also much more complicated to apply for and operate than LLCs. There are two main types of a corporation, an S corp and a C corp. An S corporation is better for smaller companies and has a 100-shareholder maximum, whereas a C corporation has unlimited owners and can be global. Usually, investors are more interested in C corporations because they have massive growth potential. 

Limited Liability Company

An LLC offers more flexibility than a corporation and recognizes the owners as members who are protected from personal liability but utilize the members’ personal tax returns. For this reason, if personal liability protection is a top priority in starting a brewery or distillery, a corporation might be a better choice for you. An LLC also does not require a board of directors, and there is no limit to the number of members. 

One of the main factors to consider when choosing an entity is taxation and how that can affect your business and profits. Corporations can be subject to double taxation, with both the business and shareholders can be taxed. An S corporation can avoid this by passing profits and losses through to shareholders, while an LLC requires that taxes for the business are reported on the owner’s tax reports. 

It could also be good to speak with your liquor attorney about an exit strategy. If your distillery or brewery is being envisioned as a family business, maybe to pass it down in your family or keep it local and small, an LLC is probably best. If you’re starting an RTD brand or a liquor company you would like to see grow exponentially, a corporation could work better for ease of transfer and tax implications. 

It is also important to consider state-specific liquor laws that might require a localized liquor license or incorporate taxes that vary in each state. Liquor laws can be very complicated, and starting your brand in Massachusetts is going to look very different from starting in Wisconsin. 

Another type of entity is a nonprofit, which some beverage companies have done in the past. Like the other options, owners are not directly tied to business liabilities, but unlike the other options, your company will be tax-exempt with a 501(c)(3), and any profits that are made through the business will be going directly to a charitable organization or cause of your choice. It’s a bit different, but if your goal is to give back to your community, it’s a great option to consider. 

Choosing the right entity for your distillery is a critical step that will affect your business’s success for its entirety. It’s very important to its financial health to get it right the first time, so hiring a specialist in the beverage licensing world is a great way to get your brand started.