Choosing a Business Structure For Your Winery (2024)
Choosing the best business structure for your winery can feel confusing. You need to consider liability protection, tax implications, regulatory requirements, and management and ownership implications.
In today's blog, we'll break down the different business structures in simple terms, highlighting the pros and cons of each.
Note: You should always consult with both your tax professional and your attorney when making a decision about which business structure is right for you. That said, whether you're just starting or thinking about making a change, this guide will give you an introduction to your options so that you can make the best choice for your winery's future success.
Types of Business Structures for Wineries
In the winery business, as in most other businesses, there are four basic business structures: sole proprietorship, partnership, limited liability company (LLC), and corporation. Each structure has advantages and disadvantages that must be considered before choosing one for your winery business.
Let’s dive into each one:
#1 Sole Proprietorships
From a legal standpoint, the sole proprietorship is the least complex business structure. Income is taxed to the individual, and the business ceases upon business termination or the individual's death. However, it does not offer the protection from personal liability that some of the other structures provide.
Example: Imagine you start a small boutique winery. As a sole proprietor, you handle all aspects of the business, and any profits go directly to you. However, if a customer sues the winery, your personal assets (like your home) are at risk.
Pros of a Sole Proprietorship:
Easy and inexpensive to establish.
The owner has complete control.
Income is taxed once, directly to the owner.
Cons of a Sole Proprietorship:
The owner is personally liable for all business debts and obligations.
Difficult to raise capital.
#2 Partnerships
When you choose a partnership structure for your winery, you're teaming up with one or more people to share ownership. Partnerships come in two main forms: general partnerships and limited partnerships.
General Partnership (GP): In a general partnership, all partners actively manage the winery and share responsibility for the business's debts. This means each partner has a say in how the business is run and is personally liable for any debts or legal actions against the winery.
Example: If you and a friend run the winery and make decisions together, you're in a general partnership. If the winery faces a lawsuit, both of your personal assets could be at risk.
Limited Partnership (LP): A limited partnership includes at least one general partner who manages the business and is personally liable, and one or more limited partners who invest money but don’t participate in daily operations and have limited liability.
Example: Suppose you run the winery, but your relative invests money without wanting to be involved in day-to-day decisions. Your relative would be a limited partner, risking only their investment, not personal assets.
Pros of a Partnership:
Shared responsibility and decision-making.
Easier to raise capital than a sole proprietorship.
Pass-through taxation (profits and losses are reported on individual partners' tax returns).
Cons of a Partnership:
General partners are personally liable for business debts.
Potential for conflicts between partners.
#3 Corporations
Choosing a corporation as your business structure provides strong protection against personal liability. This means that your personal assets (like your home or car) are generally safe if your winery faces legal issues.
However, corporations require more paperwork and formalities than other business structures.
Note that businesses are incorporated at the state level. Once you form a corporation at the state level, you will be taxed as a C-Corp by the IRS unless you choose to make an election to be taxed as an S-Corp.
C-Corporation (C-Corp): A C-Corp is a standard corporation. It can have an unlimited number of shareholders and is often chosen by larger businesses that want to raise significant capital by selling shares.
The main drawback of the C-Corp is double taxation. The company’s profits are taxed at the corporate level, and then shareholders pay taxes again on any dividends they receive.
Example: If your winery grows substantially and you want to attract big investors, forming a C-Corp allows you to sell shares. However, be prepared for the company to pay corporate taxes and for you to pay personal taxes on your dividends.
Pros of a C-Corp:
Formal structure works well for large enterprises
Share structure allows individual or other entities to buy equity in the business
Access to capital: Easier to attract investors and raise funds.
Perpetual existence: The business continues even if the owner leaves or passes away.
Employee benefits: Can offer stock options and benefits like health insurance.
Cons on a C-Corp:
Administrative burden: Requires regular meetings, record-keeping, and compliance with formalities.
Potential for double taxation: Corporate income is taxed, and shareholders also pay taxes on dividends.
S-Corporation (S-Corp): An S-Corp is designed for smaller businesses. S-Corps have several limitations that don’t apply to C-Corps. For instance, S-Corps are limited to 100 shareholders and certain kinds of entities cannot be owners of S-Corps.
Taxes: S-Corps are taxed very differently than C-Corps. Profits and losses pass through the company directly to the shareholders' personal tax returns, avoiding double taxation. But take note of the opposite side of the coin: as a trade-off for avoiding double taxation, profits from the business are included as taxable income to the shareholders, whether or not the shareholders takes the profits out of the business or leaves them invested in the business.
Limited Liability Company (LLC)
An LLC is an entity that blends aspects of both corporations and partnerships. Owners, called members, have limited liability, meaning they are not personally responsible for the company’s debts.
In order to maintain the protected status of the LLC, you should be careful not to “pierce the corporate veil”. This means that you need to treat your LLC as what it is: an entity separate from yourself. Maintain separate bank accounts and don’t use business funds for personal expenses.
Note that LLCs are formed at the state-level. In the eyes of the IRS, LLCs are what is called a “disregarded entity.” What this means is that a single-member LLC will default to being considered a sole proprietorship for tax purposes, while a multi-member LLC will default to being considered a partnership for tax purposes.
For both sole proprietorships and partnerships, the profits and losses pass through directly to the members’ personal tax returns.
Both single-member and multi-members LLCs can elect to be considered as S-Corps for tax purposes. For profitable businesses, there can be significant tax savings by electing to be taxed as an S-Corp, rather than a sole proprietorship.
The savings come from the fact that business profits over and above the owners’ salary are not subject to self-employment tax, which can be a significant burden for sole props and partnerships.
However, there are other costs to being an S-Corp and other regulations you need to follow, so make sure you consult with your CPA and your attorney to make sure an S-Corp is right for your situation.
Pros of an LLC taxed as a disregarded entity:
Limited liability protection for members.
Avoids double taxation; profits and losses pass through to members' personal tax returns.
Flexible management structure.
Less formalities and regulations compared to corporations.
Cons of an LLC taxed as a disregarded entity:
More complex than a sole proprietorship or partnership.
Varying regulations and costs, depending on the state.
Pros of an LLC taxed as an S-Corp:
Self-employment tax savings: Profits distributed as dividends are not subject to self-employment taxes.
Cons of an LLC taxed as an S-Corp:
Restrictions on ownership: Limited to 100 shareholders and certain types of entities cannot be owners.
Increased complexity: Requires careful management of salary vs. distributions to comply with IRS rules.
Administrative burden: More complex than a LLC taxed as a disregarded entity.
Distribution restrictions: Shareholder distributions must be taken in proportion to their ownership percentages.
State vs IRS
The below table will help explain how the entities for tax purposes correspond to the entities at the state level.
As you grow
You can change your structure as you go along. In general, it is easier to change from a less complex strcuture to a more complex structure.
There may be tax consequences to changing business structures, especially when you bring in new owners or go from a more complex to a less complex structure, so make sure you consult with your CPA and your tax attorney before making a change.
Typical business structure for wineries
According to records, most wineries in the U.S. are partnerships or S corporations.
Often, if a winery owns significant assets such as vineyards or buildings, the assets will be held in a holding company. A holding company is a separate legal entity that holds the assets of a company. The purpose of a holding company is to protect your assets–your land, buildings, and equipment.
It is not recommended to keep real estate in an S-Corp. In most cases, a holding company should be structured as an LLC at the state level and taxed at the federal level as either a disregarded entity (Sch C) or a partnership (if more than one owner).
The operating company can be structured as an LLC, partnership, or S-Corp. The operating company will pay rent to the holding company for use of the assets.
How to Legally File an LLC or Corporation For Your Winery
If you have decided to form an LLC or corporation, it is important to understand the process and requirements for doing so.
Forming an LLC:
File Articles of Organization with your state’s Secretary of State.
Include your business name, purpose, and members' names and addresses.
Pay the required fees (varies by state).
Forming a Corporation:
File Articles of Incorporation with your state’s Secretary of State.
Include your business name, purpose, and directors' and officers' names and addresses.
Pay the required fees (varies by state).
You will also want to spend the time to craft an operating agreement that addresses all relevant issues with your business partners. Your business attorney is the right person to help you with this.
Final Thoughts
Choosing the right business structure for your winery is a critical decision that can impact your liability, taxes, and ownership relations.
Whether you opt for a sole proprietorship, partnership, LLC, or corporation, each has its unique benefits and challenges. As your winery grows, you may find that your business structure needs to evolve as well.
Always consult with your tax professional and attorney to ensure you're making the best choice for your specific situation. By understanding your options and seeking expert advice, you can set your winery up for long-term success.
Cheers to your winery's future!
