Hoops abound when starting a microbrewery
Thinking of jumping on the Beer City USA bandwagon and starting your own microbrewery?
There are several legal ins and outs you need to keep in mind before and after you take the leap, according to Kreis Enderle attorneys Dan McGlinn and Peter Kosydar.
The pair shared some of the key business and financing issues new breweries are likely to face as they prepare to launch.
McGlinn said new brewery owners scouting the scene in West Michigan will benefit from an atmosphere of camaraderie, which will be a great help as they approach step one of the process: talk to other brewery owners.
“You’ve got to do your research,” McGlinn said. “Oftentimes in the microbrewery field that involves talking with other microbrewers. They are an interesting lot. They share information a lot. You wouldn’t think potential competitors would share information, but they do.”
McGlinn said that is because most of the area’s microbrewers understand the benefits of a designation like Beer City USA and are eager to continue boosting the region’s reputation, which in turn attracts more visitors.
“You see it in Grand Rapids and Kalamazoo,” he said. “The more breweries you have, the greater it is as a destination for people to visit, so it creates the rising boat effect.”
Once the research phase is complete, McGlinn recommends working with professionals such as CPAs, lawyers and others to put together a detailed business plan.
“You need to figure out what you are going to need to do and where the money is going to come from in order to establish your brewery,” he said.
Then comes the formation of the company, or rather companies: McGlinn said for tax and liability purposes, two companies are usually formed.
“One is a limited liability company to own the real estate and the other is the one to own and operate the brewery, which is typically an S-corporation or an LLC,” he said.
A name and trademark should also be under consideration at this point. McGlinn said doing a thorough check to ensure the new brewery’s name and logo don’t infringe on anyone else’s is essential.
The next step is to develop a shareholder or operating agreement.
“Basically, what their commitments are — financial commitments among the owners, time commitments, and what is going to happen if certain events occur during the life of these businesses, such as a death or disability,” McGlinn said.
He said throughout the process owners should also be hunting for the right location. He said in Michigan, a school or church has the legal right to oppose a brewery within 500 feet of their enterprises, so ensuring the location won’t meet any roadblocks from neighboring organizations is important.
McGlinn said working with local leaders could be especially helpful. In addition to apprising them of potential barriers to certain locations, government officials can also help owners identify any incentives or economic tools for which they might be eligible.
“Typically, you are going to want to own it because you are going to be making some very unique improvements to the property,” McGlinn added. “A lot of the equipment is moveable, but oftentimes you design very unique aspects to a building so that it can function well as a microbrewery.”
With a location secured and plans in place, a new brewery needs to apply to the Michigan Liquor Control Commission for a license.
An investigator will be assigned to meet with the owners at the location, which is probably in the build-out process at this point, and make sure everything is in order. Once the investigator completes his or her review, the application goes before the LCC.
Financing a new operation also needs careful consideration, especially related to laws that may apply to certain types of financing options. Recently, for example, the state of Michigan passed the Michigan Invests Locally Exemption, which allows businesses to take advantage of crowdfunding to raise money for a venture such as a brewery.
“If anyone is going to consider crowdfunding, they need to work closely with an attorney that is knowledgeable in securities law,” McGlinn said.
Kosydar said there are several requirements a company must follow when pursuing crowdfunding, the first of which is that the entity is incorporated or organized in the state of Michigan and all investors are Michigan residents.
There are specific regulations when seeking funds from accredited and unaccredited investors, as well.
“If you are looking and seeking investment from unaccredited investors, the maximum amount of funds you could generate could be $10,000 per unaccredited investor,” Kosydar said. “An accredited investor is a person with a net worth, excluding their home, that exceeds $1 million at the time of purchase, or if their income exceeds $200,000 in the two most recent years, or $300,000 with their spouse.”
There are several administrative and reporting requirements when taking the crowdfunding route. Ten days before making the offering, the company must file a notice with state, which requires the company to provide the state and every prospective investor with a disclosure statement.
Kosydar said some of the items included in that disclosure statement are a description of the issuer, entity type, business plan, formation history, identity of all owners with more than 10 percent interest, and summary of the executive officers, directors or managing members.
“They want to make sure everyone who would be investing is well informed about the entity,” he explained.
The law also requires a quarterly report filed with the state, which contains information about the directors and officer compensation, operations analysis and the financial condition of the company.
Kosydar said a brewery would want to avoid being classified as a broker-dealer or an investment advisor. “That is an administrative nightmare if you fall under those categories,” he said.
He recommended using crowdfunding site localstake.com to avoid the broker-dealer classification. An additional benefit of going through localstake.com is it takes on the burden of ensuring all prospective investors are Michigan residents.
McGlinn said the bottom line is that crowdfunding will require a lot of additional administrative and compliance pieces.
“My general recommendation is to try to keep life simple,” McGlinn said. “If you can find the sources of funds yourself — your own money and/or loans — that is going to reduce the amount of administrative burden you are going to have from a securities and liquor control standpoint.”