Most Brewery owners we work with have heard of the “c-corp” and the “s-corp,” and mistakenly believe that these are types of business entities they might use to run their breweries. However, these terms are not types of business entities but are simply tax classifications. In other words, a company might be taxed as one or the other during its lifetime even though it is incorporated as a single type of business entity.
Without going into too much detail, suffice to say that a c-corp structure is generally undesirable for new breweries. A company taxed as a c-corp is subject to “double taxation.” That is, the company pays taxes on its earnings, then the shareholders pay tax on the dividends they receive. It’s an inefficient arrangement, especially for owners. Two other tax classifications, partnerships and s-corps, are more common for craft breweries. In both a partnership and an s-corp, the company does not pay income tax on its earnings. Although you should work with a CPA from day one to ensure you’re being taxed efficiently, many breweries are best served by being taxed either as a partnership or s-corp. Often, your CPA will advise you to switch from being taxed as a partnership to being taxed as an s-corp when your Brewery begins generating sufficient income. Although it may be somewhat more complex to file your tax return as an s-corp, that expense can be offset through tax savings.
The reason LLCs are often better for new breweries is that they are tax chameleons. They can be taxed as partnerships, s-corps, or c-corps if you write your operating agreement correctly. Thus, in its early stages, your Brewery can be treated like a partnership, then it can elect s-corp status after it gets off the ground (for up to three years after formation). If you want c-corp status for some reason, that’s possible too. By contrast, corporations must be taxed either as a c-corp or an s-corp, depending on how they are set up.
Although LLCs are more flexible from a tax standpoint, there are somewhat complex tax rules that govern which classification your LLC can select. Be sure to consult with an attorney and a CPA when setting up your company to ensure you comply with those rules.