Laws of the jurisdiction in which the business is organized, as well as laws of all jurisdictions in which it will conduct business, govern distillery business formation. As such, the body of law governing distillery business formation is complex and ever changing. The first step in the formation of a business is selecting the business entity with which business will be conducted.
A distillery business must elect whether to conduct business as a sole proprietorship, a partnership (general partnership, limited partnership, limited liability partnership), limited liability company, or a corporation. In selecting the business entity, our Zeller business attorneys will walk our clients through a number of factors, including control, taxation, liability, and raising capital.
Choosing An Entity
The following is a brief review of the four types of business entities distilleries must elect when forming their business.
This type of business entity is for the entrepreneur who conducts business for him or herself. This business entity is not separate from the individual, and as such, besides industry-related licenses and permits, there are no special filings required for a sole proprietor to conduct business. A sole proprietorship is created when the entrepreneur begins conducting business. However, with a sole proprietorship, the business owner is limited by his or her personal capital contributions because this type of entity does not have shareholders or members. A sole proprietorship is the most basic of the four entities. As its name indicates, a sole proprietorship is created when an individual manages the company and is resposnsible for all of the decision making. It is not a separate entity and it has no existence separate and apart from the individual. There are no special filings required before a sole proprietor may begin conducting business (aside from any industry‐required licenses and/or permits). The entrepreneur must merely begin conducting business and a sole proprietorship is formed. A sole proprietorship is not taxed separately from the individual and must claim any profits the company makes during the year in his or her own personal income taxes. A sole proprietorship enables an individual to have complete control of the business and business decisions, and it simple to create; however, it also means an individual’s personal assets are not protected as he or she is personally liable for the business’s debts and obligations.
This business entity is reserved for when two or more people decide to conduct business together. Each partner is taxed on an individual basis and there is no protection for the personal liability of its owners. The formation of this type of business is simple, and, like a sole proprietorship, there are no special filings required, although, our Zeller attorneys highly recommend the creation of partnership agreements that define the relationship between the partners. Depending on particular circumstances, our Zeller attorneys advise our clients as to whether a general partnership or limited partnership is better suited for that business’s particular needs.
Limited liability Company (LLC)
This popular type of business entity is governed by statute. An Illinois LLC is formed by filing articles of organization with the Illinois Secretary of Sate. Member or members of an LLC are not personal liable for the business’s debts or obligations, beyond the capital he or she, or they, initially contributed to the business. Typically, LLCs are taxed as pass-through entities. However, members of an LLC are taxed for their ownership in the business regardless of whether or not they actually made revenue. A distillery organized as an LLC conducts its business according to its operating agreement. This type of business entity can be managed by the members or by managers.
Corporations are complex business entities. Formation of a corporation requires filing articles of incorporation with the Secretary of State. A corporation may have one or more owners, called shareholders. A corporation is its own entity, which means it can sue and be sued; it can incur debts and liabilities. A disadvantage associated wit corporations is that it is “double-taxed.” The corporation is taxed individually, and its shareholders are also taxed individually. A great advantage of this type of business is that shareholders have limited personal liability: they will not be personally liable for obligations or debts that surmount the capital they contributed to the corporation. However, the corporate liability shield may be pierced under certain circumstances, such as failing to keep up with formalities associated with the corporation. The articles of incorporation, bylaws, or shareholder control agreement create and enforce the shareholders’ rights and duties.