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Why should a brewery start out as an LLC?

June 22, 2012 2 comments
Startup financing cycle

Startup financing cycle (Photo credit: Wikipedia)

So, I got this question late last week and advised a client appropriately, but perhaps it is worth a bit more discussion / generalization. Sorry this post turned out longer than most, but it is all important stuff. So here goes:

You may have seen my article earlier on LLC v Inc, and that is all generally valid. But there’s more to it than that (as you might expect).

As a start up brewery, if you’re looking to limit your liability (and you are) and you looking to raise capital (and you will be), you want to be some sort of business entity other than a General Partnership or a Sole Proprietorship. For the most part that points you to either an “LL” company or a traditional Corporation (Inc.). Unless you’re looking to structure the business as a partnership (which would be… unusual for a brewery), you’re focusing on an LLC or an Inc.

Why an LLC?

  1. Design: An LLC is *designed* to be owned by only a few people and that the interest (i.e. ownership) in the company doesn’t change much. Sounds like a start-up brewery so far. A traditional Inc. uses stock to define ownership and (just like IBM) you can buy/sell or trade stock to change ownership. But, as an owner of an LLC, you’re a Member of the LLC, and membership (so they say) has advantages. As a Member, it is hard for the company to get rid of you and you are guaranteed broad voting rights (for the most part) in the company. The law protects Members and Members’ liability is limited only to what they put into the company (you can’t lose more than you’ve already invested). Sounds pretty good.
  2. Income: Like an S-Corp, an LLC avoids the so-called “double-taxation” problem by letting the income pass through the LLC to you as a Member. That is, you only get taxed on what you get paid by the company, not what the company makes. Big difference. When you’re starting up a brewery, no one expects to make money very quickly, and if they do it’s all going back into the business, right? Well with an LLC, the company doesn’t pay income tax on that money. Sounds pretty good.
  3. Formalities: The threshold for conducting “business formalities” (such as owner meetings, reports, voting, etc) is pretty low AND you get to decide what and how you’ll do it. You define this structure (and the operating structure of the business) in the LLC’s Operating Agreement (works like the By-Laws in a traditional corporation). This agreement says who runs the company, who owns the company, who gets to decide what, and how the company will generally function. “Formalities” sounds like it’s no big deal, it is a big deal. Without adhering to the formalities, a court can decide that your “company” isn’t really a “Company” and that they’re going to ignore the limited liability part of the LLC. That is, you could lose the limitation on liability and that was one of the main reasons why you started a Company to begin with. Formalities, hmmm, generally a pain, but at least the LLC sounds like it makes it as little pain as possible. Sounds… well, it doesn’t sound *bad*.
  4. Employees: Because of the “income” bit above, an LLC is designed so that most of the income goes to the Members and the Members are active in the business. This TOTALLY sounds like a startup brewery. When there’s just a few of you opening a brewery, it’s more than likely that you’ll also be the only employees of the company – at least for a while. Having an LLC really simplifies the taxes, payroll deductions, reporting, and payroll process for getting paid if you’re a Member and not just an employee. Having non-owner employees is a major reason for going with an Inc instead of an LLC. Sounds like that fits too.
  5. Flexibility: This is probably the single biggest reason I advise people to go with an LLC. An LLC gives the Members a tremendous amount of latitude to define how they’ll run the business. You can designate Managers (that run the day-to-day business) as a distinct sub-set of the Members, so you can have folks that are purely investor/owners and not employee/owners. Also, like I said above, you get to write the Operating Agreements (and there aren’t a lot of requirements). You want to have an Official Meeting only every other year? Go for it. You want to only let people from Debuke, Iowa be members? It’s your prerogative. The important bit is that you have some governing document, the content or rules are (more or less) your call. Oh, and all it takes to change those rules? The Members write/adopt a new Operating Agreement – so the rules can change over time as you grow or change strategies. That part sounds really good if you’re a startup.

Ok, that’s the basics. I think these few reasons definately point a startup brewery toward an LLC as a first step (you can always change later). Think about it.

Keep in mind that the above is (1) VERY general and (2) does not constitute legal advice, just some thoughts. You should always consult an attorney licensed in your jurisdiction to make sure that you’re making the right decisions for your business. If you need help in NC, drop us a line at info@jslawcenter.com or check out our website at www.jslawcenter.com

Starting a Business: Inc v LLC

May 14, 2012 2 comments
IRS building on Constitution Avenue in Washing...

IRS building on Constitution Avenue in Washington, D.C.. (Photo credit: Wikipedia)

PC, PA, LLC, LLP, Inc, LLLP, huh? There are so many acronyms and they’re thrown around all willy-nilly. What’s an aspiring entrepreneur to do?

So, here’s the thing. Each of these denotes a form of business, how a business is structured and who the “owner” is. Each is also relates to two special topics: (1) taxes and (2) liability.

I’m not an accountant nor a tax attorney, so I’m not going to give too much advice on taxes, but I’ll give you some basics. I’ll spend most of this post on the liability question. But first, the tax basics…

Generally speaking (and almost universally before 1987), if you formed a corporation (think companies like IBM, Inc., Coca-Cola, Inc., etc) the profits of the corporation were taxed as income to the corporation AND they were taxed again as income to the individuals that owned the company – the so-called double tax problem. However, in the last 20-30+ years the IRS has allowed the profits for certain kinds of companies to be taxed only once – when the owners claim it as income. Who wants to get taxed twice? Or even once, if we can avoid it? Get with your accountant or tax attorney for the details.

So, back to the liability stuff. One of the main reasons someone creates a corporation is to establish a liability shield between the business and themselves. Example: a customer gets hurt by your product. They sue the company. If you’re a sole proprietorship (i.e. no corporation), they can take everything the company owns AND everything you personally own. If you’re a corporation (and follow certain rules), they can take everything the company owns but they CAN’T get to you personally. That’s big. Limiting liability encourages business owners to take risks and drive the economy without being terrified that they’ll lose everything they’ve ever had or will ever have.

All those acronyms at the beginning identify the type or corporate structure, how it’s used, and what you can expect liability-wise.

To figure out which acronym (and, therefore which business form) is right for you, contact your business attorney. Or stay tuned here.

In the meantime, check out our website at www.jslawcenter.com

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