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Liquor Law Update – October 2013

October 14, 2013

Starting a Craft Brewery:  Business Tips for the New Entrepreneur

by Timothy J. Horstmann

The Craft Brewing Industry is booming in America. According to the Brewers Association, since 2000, the number of craft breweries operating in the U.S. has increased by more than two-thirds. Over 2,500 craft breweries operated for all or part of 2012. New breweries continue to open.

In Pennsylvania, there were at least 107 breweries in operation in 2012, putting Pennsylvania roughly in the middle for the number of breweries per capita. With new breweries opening in 2013 and more in the works, it would appear that there is still room to grow in this industry.

What is driving the growth of the craft brewing industry? Many in the industry point to the rise in popularity of “home brewing,” the ultimate in micro brewing where beer enthusiasts purchase beer-brewing ingredients to create their very own concoctions – to varying results.  Once a hobby of the few, the practice of making beer in your kitchen or garage has recently entered the mainstream and become legal in all fifty states, with home brewing clubs and home-brew supply shops bubbling up to cater to the trend. The American Homebrewers Association, a trade association devoted to the art of home brewing, has also increased its prominence in recent years.

For home brewers looking to turn their passion for craft beer into a business, now seems as good a time as ever to dive in. Before doing so, however, home brewers and other interested parties should follow these five points to ensure a successful startup of their venture:

(1) Form a Company
If you’re going to turn your passion for craft beer into a business, you need to treat it like a business. The first thing you should do is form a legal entity to operate the business. Running your business through a legal entity provides you with valuable legal protection against lawsuits seeking to impose personal liability on you for claims against the business. Generally speaking, your maximum exposure to a claim against the business is limited to the value of your investment in the company. Absent a personal guarantee, your personal assets are not at risk. You should consult an attorney to determine which type of entity is best suited for your situation, and to ensure that the entity is set up properly.

(2) Outline the Rights and Responsibilities of You and Your Partners
Once you’ve selected your business entity and organized it, you should set forth what rights and responsibilities you and your partners will have in the new business venture. You should consult an attorney in undertaking this process, who can assist in drafting the proper legal document to memorialize the understanding of the partners. Among other things, this document should address the ownership structure of the business, management rights, the valuation of ownership interests and the circumstances under which an interest may be sold or otherwise transferred. Putting you and your partners’ understanding down in writing at the beginning of the venture will help you avoid valuation disputes and the potential loss of control of your business should a partner decide to move on.

(3) Assign Brewing Equipment and Other Assets to the Business
If you’ve been home brewing for a while, you most likely will have purchased some brewing equipment and other assets for use in your home brewing operation. These assets should be assigned to the new entity as the owner of the business which you will be running. An attorney can assist you in documenting that the assignment has occurred. This step is especially important for any business partners that are not actively involved in the brewing process, to ensure that in the event of a business dispute, it is the legal entity which holds title to the assets.

(4)  Protect the Name of Your Brewery 
With trademark disputes becoming increasing regular in the craft beer market, you should carefully select your brewery’s name after conducting a trademark search to make sure it’s not likely to cause consumer confusion with another trademark or invite a lawsuit from another trademark owner. Once you’ve selected and cleared the name, you should immediately begin the process of filing an application to secure a trademark registration. An attorney can be immensely helpful in undertaking the search and preparing the application. Failure to obtain a trademark registration or properly vet the availability of a name can create numerous headaches and expenses down the road.

(5)  Find a Location to Brew
Sure, the garage of your house has worked well for the last four years, but at some point your spouse is going to want to park the car in the garage again. In looking for the location of the Next Big Thing in craft beer, a good place to start is by checking out where others have set up shop. You’ll probably visit a lot of old industrial locations, strip malls and other repurposed facilities. In deciding on a location, pay careful attention to the zoning restrictions on the property and try to gauge whether the local community will support your business. Depending on where you set up, there may even be tax incentives available to help you get started.

With these five points in mind, home brewers should be on solid footing as they embark on their new venture.

© 2013 McNees Wallace & Nurick LLC

Liquor License update is presented with the understanding that the publisher does not render specific legal, accounting or other professional service to the reader. Due to the rapidly changing nature of the law, information contained in this publication may become outdated. Anyone using this material must always research original sources of authority and update this information to ensure accuracy and applicability to specific legal matters. In no event will the authors, the reviewers or the publisher be liable for any damage, whether direct, indirect or consequential, claimed to result from the use of this material.