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How to Open a Winery

  • Why You Need a Brewery Business Entity
  • Selecting a Winery Business Entity
  • How to Open a Winery

Winemaking is different from other industries in some ways, especially when it comes to regulation. But Wineries are just like most other businesses in that their owners almost always should set up business entities to protect themselves from potential legal liability. A “business entity” for our purposes is a company with its own independent legal identity, such as a corporation or limited liability company (LLC).

Sole Proprietorships and General Partnerships Are the Default Businesses for Craft Wineries If you are manufacturing alcoholic beverages without a business entity, chances are that you are a sole proprietorship if you are the only owner, or a general partnership if you are working with co-owner partners.

Sole proprietorships and general partnerships are extremely common types of businesses because they can be formed by accident. If you do business alone under your personal name, or some made-up business name (also known as a “DBA” or “assumed business name”), you are a sole proprietor by default. If you go into business with other owners who help you manage the business, also known as “partners,” your company is a general partnership by default. You do not have to sign any contracts with anyone or file anything with the government to be a sole proprietor or general partnership, the law imposes those labels on you.

Because sole proprietorships and general partnerships are just labels, they are not business entities with a separate legal identity from you. You’re doing business in a personal capacity and therefore can be personally liable if something goes wrong. If someone comes looking for payment on a debt, they can try to take your personal assets in a lawsuit. Although all states have laws to prevent you from being left penniless on the street, facing personal liability can be a tremendous burden on you, especially if you have accumulated assets beyond your personal home and vehicle.

For extremely low-risk businesses, going without a business entity is an acceptable risk. For example, if you sell $500 worth of greeting cards on Etsy each year, you can probably do so as a sole proprietor and be just fine. But for entrepreneurs starting a craft Winery, you will be facing multiple kinds of liability.

First, you will likely have potential contractual liability. Contractual liability is risk you take on voluntarily by making agreements with others. You might have a lease for your physical space, contracts with vendors for inputs or packaging, a bank loan, agreements with distributors, etc. In any contract, something could go wrong or you might run low on cash to make a payment.

Second, you will likely have potential non-contractual risks, sometimes called “tort” risks. This is risk you face regardless of whether there is a contract involved. These kinds of risks come in many forms, some of which are difficult to foresee. For example, if you permit visitors in a tasting room, what happens if someone slips and falls? What if a bottle of your product shatters and injures someone? Or, imagine that you hire a head winemaker who steals a recipe from a competitor? In each scenario, the aggrieved person could very well look to you for payment. This is especially true in the Winery business because a single mishap—someone choking on a foreign object in bottle for instance—could lead to millions of dollars in losses.

A separate business entity, such as a corporation or LLC, will generally shield its owners from personal losses if something goes wrong. In other words, if you do run your Winery through an entity, the entity is the “person” conducting business, not you personally. If something goes wrong, the entity will be sued, not you. Only the entity’s assets are at risk. If some catastrophic loss occurs, and your entity has a liability it can’t pay, then your entity goes into bankruptcy, not you. Accordingly, we advise all of our clients to form entities in the early stages of starting a Winery.

Merely forming the entity is not enough, however. You must actually conduct business through that entity. This means your entity should sign contracts, own the equipment and other property, and should hold itself out publicly as the entity that runs the Winery.

You must also keep your company finances separate from the personal finances of the owners. Obtain an Employer Identification Number for the entity. You can do this yourself on the IRS website. At a minimum, you should also develop a relationship with a CPA who can advise you on setting up a separate company bank account, taxes, and bookkeeping. If your personal finances are muddled with company finances, such as by combining bank accounts or failing to track income and expenses separately, the separate legal status of your business entity can vanish.

 

After forming an entity, you should obtain sufficient liability insurance for your Winery, too. Liability coverage puts the insurer on the hook if you have an unforeseen claim against your company. Just make sure the insurance policy covers against all the reasonably foreseeable liability you might face. In the event of a lawsuit, you want the insurance company paying your attorneys and covering losses if they occur. Start by consulting with an independent insurance broker, not a captive agent working for a single insurance company.

Should you start your craft Winery through a sole proprietorship, a partnership, a limited liability company (LLC), an s-corp, or a c-corp? As described in Why You Need a Business Entity for Your Winery, a sole proprietorship or general partnership are probably not good choices for you. In most instances, the decision comes down to whether to form a corporation or an LLC. We’ll make that decision easy: for almost all new wineries, an LLC is the right choice. Below, we explain the difference between LLCs and corporations, why LLCs are generally preferable, and how the s-corp and c-corp labels fit into all of it.

Corporations are the traditional, tried-and-true business entity that has existed in one form or another for hundreds of years. They are created under state law, so the rules vary across the country, but they generally are set up using the same format in each state. Corporations generally have a more rigid, hierarchical structure. Shareholders are at the top—they become owners by buying shares or stock in the company. Shareholders make money on their investment by receiving dividends out of the company’s income. Below the shareholders is a board of directors. Directors are elected by the shareholders and are responsible for the corporation’s major strategic decisions. Some corporations pay their directors for their service. Directors also generally select the company officers. Officers are the executives running day-to-day operations, and their titles vary from company to company. They include “CEO,” president, secretary, CFO, etc. Below the officers are the rest of the company’s employees.

Corporations are typically formed by filing articles of incorporation with your state’s government, usually the secretary of state’s office, along with a fee. The articles describe the general structure of the company and describe the kinds of stock that exist. Well organized corporations also have bylaws to provide rules for how the company is managed and how its directors and officers make decisions.

The LLC is a more recent innovation. It was not until 1977 that Wyoming first passed a law enabling business to incorporate as LLCs. Today, the majority of new American business are LLCs. You can form an LLC in every state, even if you have no co-owners.

The owners of an LLC are usually called “members.” An LLC is an entity formed when a member files a certificate of organization (or similar) with the state government, along with a filing fee. The certificate of organization is usually simpler than a corporation’s articles of incorporation. Often, it is just a one-page form calling for your company address and the name and contact info for just one member.

Well-organized LLCs are usually governed by a contract called the “operating agreement,” which describes how the LLC is structured similarly to a partnership agreement in a partnership. The LLC’s owners sign the operating agreement to become members. The operating agreement can be as simple or complex as you want it to be. It can describe how the company is managed, how income is distributed, and what happens if someone wants to leave the company. It can also describe different kinds of ownership interests, much like different classes of stock in a corporation. Most states allow for some members, called “member-managers,” to run the company and for other members to participate in the company as passive investors. The members of a company receive company profits in the form of “distributions.”

Both LLCs and corporations are business entities with legal identities separate from their owners. If the entity is sued or otherwise liable for something, it is the entity’s assets that are at risk, not the personal assets of the owners. For a Winery, which is a moderately risky type of business, this kind of protection is very useful, especially when combined with proper liability insurance. For more on why you need a business entity, Click Here

There are other similarities. Both LLCs and corporations are typically acceptable vehicles for soliciting investors. Both require periodic filings with and (potentially) payment of fees to the state government, their own tax preparation, and their own finances. But, for most new wineries, LLCs are a better choice.

The TTB, the Federal agency that regulates wineries, does not particularly care what kind of company you have, but you should. Accordingly, for most new wineries, especially smaller businesses, the LLC is preferred over the corporation. They are more flexible and easier to run and set up.

Corporations have a hierarchical, rigid structure of shareholders, directors, and officers. Drafting the governing documents can require a bit more legal work than an operating agreement for an LLC.

Running a corporation also requires more clerical work. Someone has to keep shareholder ledgers, call director elections, conduct director and shareholder meetings, draft and track corporate resolutions, and deal with other corporate formalities. These are tasks that can divert your attention from running your Winery. In larger companies, these levels of formality can be helpful by distributing clear decision-making power among different people, especially when there are managers or investors who have diverging interests. This can happen, for example, where some investors are interested in seeing a company grow rapidly so it can be sold off, while others may not want rapid growth and instead prefer to treat the Winery as a lifestyle business. But in smaller wineries, there may only be one to four people who own and run the company, and oftentimes they are close friends or family. If they set themselves up as a corporation, the same handful of people will be shareholders, directors, and officers anyway. An operating agreement can allocate managerial authority among these people in a simpler, more efficient way.

Most Winery 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 wineries. 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 wineries. 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 wineries. 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 wineries 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 Winery 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 wineries 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 Winery 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.

Although LLCs are a streamlined option for most new businesses, sometimes corporations are still better. These are some of the advantages:

Angel investors and venture capital funds might prefer to buy stock in a corporation because they are more familiar with a corporation’s structure. This is especially true where the investors don’t personally know the company’s managers. Investors may also perceive that stock is easier to resell to someone else than ownership in an LLC, even though this is untrue as a general rule.

It is possible to offer equity (ownership) to attract talented employees to your company in either a corporation or an LLC. However, seasoned executives might be more familiar with corporate stock options than they are with the kinds of incentives an LLC might offer.

There may be tax reasons for which your CPA will advise you to set up a corporation and seek c-corp status. For instance, it may be easier to provide fringe benefits to executives and employees through that structure.

Regardless of the entity you choose, your Winery is off to a much stronger start if you do your homework up front. Before you or your co-owners spend a dime on your business, form a competent team to advise you, including an attorney and a CPA. They will ensure you do not encounter any nasty surprises just as you’re trying to get off the runway.

Should you start your craft Winery through a sole proprietorship, a partnership, a limited liability company (LLC), an s-corp, or a c-corp? As described in Why You Need a Business Entity for Your Winery, a sole proprietorship or general partnership are probably not good choices for you. In most instances, the decision comes down to whether to form a corporation or an LLC. We’ll make that decision easy: for almost all new wineries, an LLC is the right choice. Below, we explain the difference between LLCs and corporations, why LLCs are generally preferable, and how the s-corp and c-corp labels fit into all of it.

There are number ways you can become involved in the wine industry. Your level of involvement depends, in large part, on the amount of time and financial resources you want to spend. The federal permit must have before starting operations depends on your involvement in the industry. Your options include:

  • Bonded Winery: This is a stand-alone winery in which you may conduct all wine-making operations including the receipt, production, blending, cellar treatment, storage, and bottling or packaging of wine.
  • Alternating Proprietorship: If you wish to produce wine, but do not have the financial ability or interest to build or buy a winery, you may contract with an existing winery (known as a host winery) to use its equipment to produce your own wine.
  • Custom Crush: A custom-crush arrangement allows you (the custom crushee) to contract with a bonded winery (the custom crusher) to produce wine your behalf. The TTB considers a custom crushee to be a wholesaler, not a bonded winery. This means that, as a custom crushee, you are not responsible for producing, labeling, or paying taxes on your wine; recordkeeping; or reporting. Instead, you pay the custom crusher to handle all of those steps and you receive fully finished, bottled, labeled wine that is taxpaid and ready for sale.
  • Bonded Wine Cellar: If you want to store, blend, or bottle untaxpaid wine but do not wish to produce wine, consider operating a bonded wine cellar (basically a bonded storage warehouse).

You can apply for a permit:

  • individually (a sole proprietor);
  • as a partnership between two people or two companies; or
  • as a legal entity such as a corporation or limited liability company (LLC).

Selecting the right business structure is important to your business’s success. Each structure has different legal and tax implications you should consider. However, we recommend forming a business entity to operate your winery to help you avoid personal liabilities.

Once you select your business structure you must form the business by filing documentation with the appropriate state entity, usually the secretary of state. The secretary of state will provide you with a certificate showing that your business has been registered. You will need to file that documentation with the TTB.

If you are opening the business with partners or other co-owners, you will also need to provide the TTB with information detailing each partner’s ownership interest and role in the business.

An EIN is a nine-digit number used by the IRS to identify your business entity. An EIN is something all business entities need for filing taxes. You will also need an EIN to apply for a DSP permit. We strongly recommend that you form a relationship with a CPA early on. A CPA will help you set up a bookkeeping system and obtain your EIN. However, you can also get an EIN yourself. Just go to: https://www.irs.gov/businesses/small-businesses-self-employed/apply-for-an-employer-identification-number-ein-online

You may want to operate your brewery under a name other than your business name. This is commonly known as operating under an “assumed business name,” a DBA (doing business as), a fictitious business name, or a trade name. To operate under an assumed business name, you must file an application with the appropriate state office.

There are good reasons for using a DBA. First, DBAs allow you to operate multiple businesses without having to create separate legally entities for each. They also allow you to select easily recognizable and memorable names for each business you operate. For example, Doe Family, LLC may own a brewery and winery which they operate as Jane’s Brewpub and Janie’s Winery, respectively. Jane’s Brewpub and Janie’s Winery are assumed business names.

The TTB requires you to file state-issued certificates showing you registered your assumed business name with your permit application.

Along with your winery name, you should select your logo early on. Logo selection isn’t essential for filing an application with the TTB, but it is essential to developing your brand.

Your name and logo are the most prominent things identifying you and separating you from your competitors in the alcohol beverage industry. You’ll almost certainly want to include them on your labels and on other products to advertise your brand.

Do not rush this part of setting up your new business. By far the most common problem we see in new wineries after they obtain a permit is that they realize all too late that they are unintentionally infringing another alcoholic-beverage manufacturer’s trademarks. In an industry as crowded as alcoholic beverages, this is exceedingly common. If another company uses the same or a similar logo or name, it could confuse customers or dilute your brand. Perhaps worse, a motivated competitor using the trademark before you could threaten you with litigation for infringement. That is why properly researching your prospective marks and registering them is so important. MWS Rose’s Intellectual Property practice group can help you trademark and protect your brand.

If another company uses the same or a similar logo or name, it could confuse customers or dilute your brand. Perhaps worse, a motivated competitor using the trademark before you could threaten you with litigation for infringement. That is why properly researching your prospective marks and registering them is so important. MWS Rose’s Intellectual Property practice group can help you trademark and protect your brand.

You will need to select the location of your winery and build out your premises before applying for a permit. When you apply for your permit, you must describe each tract of land comprising your wine premises using directions and distance. You must also clearly describe the area of the wine premises to be used as a bonded wine premises, and your method for securing and protecting the property and wine. If you use only a portion of a building for your winery, you will also be required to describe the activities conducted in the adjoining portions of the building.

Wherever you locate your winery or bonded wine cellar, you will need a copy of a lease for the space or a deed for the property. You will have to show the TTB that you are legally entitled to occupy the location when the permit is to be approved.

As we noted above, starting a winery can be very expensive. You will likely need to raise capital to get your winery started. The capital you need may be in the form of equity (selling an ownership interest in your business), debt (a loan), or a combination of the two. When someone loans a business money, the business executes an instrument such as a promissory note or bond setting forth the business’s repayment obligations. The TTB will require you to file those instruments with your permit application.

The TTB does not require you to show that you complied with state or federal securities law. However, you are still required to comply with those laws and should certainly ensure that you are doing so when you borrow money or sell equity in your business. Securities regulations are especially important when borrowing money from or selling equity to investors who will not actively participate in managing your business. If you are required to comply with any securities law and fail to do so, you could be subject to administrative, civil, or criminal sanction. Consult a knowledgeable lawyer whenever you raise money for a new business.

If you are producing wine, you must provide a step-by-step description of the procedure you will use. There are several types of wine you can produce, and the procedure for making each is somewhat different. Accordingly, you will need to decide the kinds of wine you plan to make and understand how to make each before applying for a permit.

Under federal law, you can produce the following kinds of wine:

  • Natural wine: Natural wine is the product of the juice or must of sound, ripe grapes or other sound, ripe fruit.
  • Special natural wine: Special natural wine is wine produced from a base of natural wine to which natural flavorings are added. The added flavoring may include natural herbs, spices, fruit juices, natural aromatic, natural essences, or other natural flavoring.
  • Agricultural wine: Agricultural wine is wine that is produced from suitable agricultural products other than the juice of fruit, such as honey wine.
  • Other wine: Other wines include wines such as high fermentation wine, heavy bodied blending wine, Spanish type blending sherry, wine products not for beverage use, and vinegar stock.

You don’t need to have your equipment installed or even at your winery when you file your application. You will, however, be required to submit information about your major equipment such as: size, type, intended use, and unique serial number. We recommend firming this up with an equipment manufacturer before preparing your application.

The TTB does have an online system for applicants to use. However, the system can be confusing. It requires you to accurately describe your operations, provide the information identified above, and to submit a plant floorplan that complies with the TTB’s excise tax regulations.

Starting a winery can be complicated. We’re here to help you with your federal permitting and other legal needs. If you have questions or would like to discuss our rates or packages, please do not hesitate to contact us.

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