Here’s the situation: you’ve been brewing for a few years out of your basement, or from your best friend’s dad’s garage, and your [insert style of beer] is way better than what’s available in your market—a sentiment that is not only supported by your own, purely objective taste and opinion, but is backed by your friends, family, and dedicated fans. Now you’ve got that itch in the back of your mind that you can turn this into something more than just a weekend hobby. The market is still strong and you want to see if you can make it.
Perfect. …now what?
Deciding to start a brewery is an obvious—and exciting—choice for the skilled home-brewer. Do what you love and never work a day again for the rest of your life, right? You’ll get to make a living doing what you love to do, you’ll get to share your craft more than just your friends and family, and now you’ll get to deal with all sorts of legal and regulatory issues. We certainly understand that the legal issues can be hard to navigate, not to mention costly when you get an attorney involved. However, while the path forward will most certainly not be smooth, taking time to consider the steps outlined below will help remove some tough obstacles down the road and will help keep costs down.
NOTE: this article assumes that you have taken the appropriate steps to file for a Brewer’s Notice from the Alcohol and Tobacco Tax and Trade Bureau (known as the TTB) and an appropriate license within your state.
Step One: Form an Entity.
One of the very first things that you’ll want to consider, from a legal standpoint, is forming an entity (i.e. a company) for your brewery. The most important aspect of forming an entity is to obtain limited liability for you and your other founders or business partners (if any). Absent fraud or disregard for corporate formalities, a legal entity will shield your personal assets from any liability of the brewery. The most common and sensible entity of choice for a brewery is a limited liability company (LLC), which is beneficial for its ease of formation, pass-through taxation to its owners (called members), flexibility in structure, and overall lack of statutorily mandated corporate formalities. Another viable option may be a C- or S-corporation. Both of these will also grant limited liability to its owners (called shareholders), and an S-corporation will also have pass-through taxation (note that a C-corp will also be subject to tax at the corporate level). However, in comparison to an LLC, both must observe more formal corporate formalities, and an S-corporation has certain limitations on who may be a shareholder, which may cause issues as your brewery grows.
Something to watch out for: If you haven’t formed an entity, but have taken steps in furtherance of your brewery with a co-founder or business partner, you may have unknowingly created a partnership in the eyes of the law. A partnership can literally be formed on something as simple as a handshake, with the understanding that you and your partner are going to create a brewery. While use of the word business “partner” has many meanings in the real world, in the legal world it can cause some real problems. As “partners” in a partnership, you may find yourself jointly and severally liable for obligations of the brewery, including actions that your partner took without your authorization. What’s worse, a partnership does not afford limited liability. So, if your brewery is on the hook for $10,000 to a creditor, but only has assets worth $1,000, that creditor could potentially come after both you and your business partner, personally, for the other $9,000.
Step Two: Decide Who Gets What, Who Does What, and Write It Down.
Next, if you have any co-founders or business partners, it is paramount that all of you come to terms on important aspects about the company and its operation…and reduce those terms to writing. For starters, you need to confirm the ownership split of the company. You will also, among other things, want to consider:
Outlining certain duties and responsibilities of each owner to the company (i.e. who is responsible for day-to-day operations, recipes and brewing, and financial/accounting issues?);
Voting rights of the members/shareholders and how to resolve any voting deadlocks or disputes;
Who will retain ownership of specific property (for instance, the brew system, or certain recipes or trade secrets) in the event the company dissolves;
Will profits be reinvested into the company? If so, what are the parameters of this requirement?
For an LLC, this governing document is called an operating agreement, and for an S or C-corporation it is called a shareholders’ agreement. Please keep in mind that the foregoing is not an exhaustive list, but is intended to generate some ideas to think of on the front end to help reduce headache and surprise on the backend.
Something to watch out for: Even if you are not committed—whether financially or otherwise—to engaging an attorney to prepare your operating agreement or shareholders’ agreement, we recommend that you at least begin the conversation with your co-founders or other business partners before it’s too late to renegotiate terms (or perhaps negotiate terms for the first time). Too many times we’ve seen situations where one owner intends on owning 70% of the company, whereas his or her co-founder thinks it’s 50/50. Proper planning ahead of time can help set the expectation up front and reduce the risk of disappointment (and potential legal battle) later.
Step Three: What about Trademarks (i.e. my brewery name and logo) and When Do I File for One?
Let’s be honest, one of the most exciting things for starting a new brewery is the
name, the logo, and the look and vibe of the overall brand. And, of course, the beer names and the can and bottle art. These topics will undoubtedly garner numerous discussions, spanning across the consumption of many, many drinks. Naturally, you want to protect all of this and prevent someone else from using the same—and for good reason; this is how you can differentiate yourself. So, should you file for trademark or other protections? The answer to this question will undoubtedly be yes. However, the answer to “when should you file?” requires some additional thought.
The first thing to understand about protecting your intellectual property is that while it may be necessary, it can be very expensive. If you are just starting out and don’t have a large legal budget, or you don’t want to spend much on legal (pretty much everyone, right?), then rushing out to file trademarks or other protections can quickly burn through your working capital. For example, the filing fee alone for each trademark application filed with the United States Patent and Trademark Office (USPTO) ranges from $225-400. And each fee only covers one mark, in one category of goods and services. Assuming you want to trademark your company name within the beer and beverages category (trademark category #32), your logo in the same beer and beverages category, and both your name and logo within the t-shirts category (trademark category #25) as well (every brewery needs swag)—already you’re looking at $900-1600 just in filing fees. Not to mention, you will most likely need the help of an attorney to make sure the application is filed correctly, or that any issues that arise with the USPTO during the application process (called office actions) are properly handled. If everything runs smoothly, you can expect legal fees in the realm of $1,000 per trademark (which does not include the filing fee), but keep in mind that if you encounter office actions, those fees could significantly increase. And what about all those beer names and designs for the can and bottle art?
The point here is not at all to say don’t seek these protections, because protecting your IP may be critical to your business plan and branding. Instead, we aim to make sure you understand and are realistic about initial fees and costs, and plan appropriately on the front end. Filing a trademark on your name or logo—or a patent on your new piece of equipment or design—could provide some extremely important protection because the last thing you want after you’ve invested significant time and resources into any aspect of your brand is discover someone beat you to the punch.
Something to watch out for: Think you own all your trademarks and intellectual
property? If you hired an independent contractor (or friend) to design it for you, you [may] need to think again. Unless you have a written agreement that expressly provides otherwise, when you hire an independent contractor to design trademarks (such as your logo or can art), that designer retains ownership rights. Although you will be able to use mark, logo, or art, you won’t be able to modify or change it without risking infringement on their design! This could be critical if, for instance, you need to modify the logo to fit onto your new release of 16 oz. tall boys.
Step Four: Ensure You Can Brew Where You Want.
Finally, ensure that the space that will house your brewery actually allows you to brew. There are multiple issues that you need to consider, including:
What is the zoning of the parcel that will house your brewery? Is operation of a brewery a permitted use?
Are there any local ordinances that would interfere with customers coming to your brewery?
Do you have a commercial lease on the property that will house your brewery?
Does the lease permit you, as the tenant, to construct on the premises to build your brew system?
Does your lease allow you to renew its term?
What can you do if your brewery does well and you need to expand? Does the lease allow you to expand the building? Can you terminate or sublet the lease easily to move to another location?
As before, this is not an exhaustive list, but is intended to generate some ideas for you to proactively think about.
Or, you can just not take our advice… I’m sure there are nicer people that’ll make it much, much more clear!
About the Author
Brian C. Bohm is a startup and small business attorney with Moisan Legal P.C., and is based in NYC. Brian can be reached at firstname.lastname@example.org or (646) 741-5222. If you are thinking about starting a brewery, or need help with any legal issues in running your brewery, Moisan Legal P.C. can help.