Corporation or LLC? What’s best for your beverage business
Congratulations on making it this far in launching your beverage venture! One of the first essential steps is deciding what type of business entity best suits your goals. If you’re considering participating in the alcohol industry, selecting an entity type that maximizes legal protection is crucial. This post provides an overview of the two most common entities we form for our clients—Limited Liability Companies (LLCs) and Corporations—and explains how each can be a strong foundation for your alcohol business.
Key Differences:
Liability Protection: Both LLCs and corporations protect owners from personal liability for business debts and lawsuits.
Ownership: Corporations are owned by shareholders, while LLCs are owned by members.
Management Structure: Corporations require a board of directors and formal management, whereas LLCs allow for flexible member or manager control.
Taxation: Corporations face double taxation unless they elect S-corp status; LLCs generally use pass-through taxation, avoiding double taxation.
Best Fit: Corporations suit growth-focused, investor-driven businesses; LLCs are ideal for flexibility and simpler operations.
Ownership Structure:
Corporations are a well established entity type, known for its strong asset and liability protections. If set up properly, a corporation separates the business’s assets and liabilities from its shareholders, shielding owners from personal liability.
Corporations are owned by shareholders who invest capital in exchange for shares. Corporations have no ownership cap, making them more appealing to professional investors and companies aiming for growth. This structure is ideal for those looking to raise capital, expand rapidly, or potentially go public in the future.
LLCs, on the other hand, are owned by members, with each holding a “membership interest” in the company. LLCs can have a single member or multiple members, without limitations on the number or type of members, which may include individuals, corporations, or other LLCs. This flexible ownership structure suits family-owned or closely-held alcohol businesses, offering straightforward management and personal liability protection.
Taxation
A significant distinction between these two entities lies in taxation. By default, corporations may be subject to double taxation, which subjects the business to corporate tax rates on income, and shareholders taxed individually on dividends.
LLCs enjoy greater tax flexibility. By default, single-member LLCs are taxed as sole proprietorships, while multi-member LLCs are taxed as partnerships, both of which allow for pass-through taxation, meaning profits pass directly to members’ personal tax returns.
“Can I form an S-Corp to avoid double taxation?”
Well, sort of. “S-Corporations” actually just refer to a business that has made an election to pass business income, losses, deductions, and credits through to their owners. Both corporations and LLCs can make this election with the IRS, so long as it is made during the preceding calendar year or no more than 2 months and 15 days after the beginning of the tax year the election is to take effect (most often March 15).
Choosing Based on Growth and Exit Strategy
Speaking in very general terms, if you envision your business as a family-owned or small-scale operation, an LLC might be a suitable choice, offering a streamlined structure, asset protection, and straightforward tax requirements. However, if you plan to build an RTD brand or liquor company with rapid expansion in mind, a corporation could provide an advantageous framework for growth and ownership transfer.
So, which one should you pick?
Selecting an entity structure depends on your specific goals. An LLC may be suitable if you aim to avoid double taxation, prefer flexible management, and envision a small or family-run alcohol business. A corporation might be ideal if you’re seeking investor funding, aiming for exponential growth, or plan to eventually go public.
It's crucial to consider state-specific liquor laws, as requirements vary and can impact business formation and operations. Consulting a specialist in alcohol regulatory compliance, as well as a tax professional, can help you navigate these complexities and establish your business with a strong, compliant foundation.