“You don’t know what you don’t know,” says craft-beer attorney Candace Moon.
And that, concisely, is why Moon recommends that entrepreneurs who are serious about opening a craft brewery seek legal guidance to advise them during the business formation process and to help ensure that they’re compliant.
“Running any small business can be overwhelming,” Moon says. “There are so many things, especially from a legal perspective, that you’re expected to know. When you throw in the alcohol regulations, that’s just that much more that you have to deal with on a daily basis. I don’t know how any one person could know everything.”
Recognizing a need for legal professionals with expertise in the booming craft-beer sector, Moon founded The Craft Beer Attorney in 2009. The firm assists breweries and breweries-in-planning nationwide with business law, contracts, employment law, and trademarks and copyrights, among other areas. Moon is also the author of _Brew Law 101, _a comprehensive overview that details the process of starting up a brewery, with emphasis on what owners can do for themselves, where they might consider consulting a professional, and key considerations when putting it all together.
“We spend a lot of time fixing stuff,” Moon says. “My goal is to have people do things right the first time and not run into these issues that we see.”
Here are a few areas that are potentially problematic if not approached correctly.
Forming a business entity
Starting a brewery or brewpub is essentially the same as incorporating any small business. Most issues arise, Moon says, when people either neglect to form a business entity, which demarcates professional properties and provides a layer of protection for personal assets, or neglect to account for partnerships, future growth, and outside investors in their business plan.
“A lot of people use Legal Zoom, which is fine if you’re the only person who is part of the company,” Moon says. “But almost everyone has cofounders, and if the founders decide to part ways and it’s not an amicable parting, there are going to be problems.”
Talking through those eventualities up front and detailing a plan, in writing, for various scenarios will go a long way toward alleviating potential conflicts.
Another area where it’s helpful to think through potential scenarios is when outside investors are involved.
“I talk to a lot of people who say, ‘It’s just us. We’re using our own money,’” Moon says. “And I’ll ask, ‘But what if you’re successful? Where do you think you might be in three to five years? Do you think you’ll want to expand and grow and take on investors?’ Inevitably, the answer is, ‘Well, yeah!’ That’s a different thing than just starting your own small company. You have to think longer term in an entity-forming situation.”
Moon says that most of her clients aren’t the largest investors in terms of capital when starting out but are the primary drivers of the business. In a formation where ownership is proportional to the dollar amount invested, such as an S Corporation, it’s very easy for the founders to lose decision-making control and, ultimately, ownership.
“In an LLC, however, you can set it up so control is not dependent on financial investment,” Moon says. “You can form it so you can always maintain control—if people are willing to give you the money.”
Funding future growth
Many breweries, upon initial success, choose to invest profits back into the brewery. And just as many might sell equity in order to fund expansion projects.
“You’ve got to give those people [who buy shares] a way to eventually leave your company, if they choose,” Moon says. “You also don’t want to set it up where they can sell their stock to anyone because many states have regulations in place about who can and cannot hold ownership in a brewery.
“In California, for example, anyone who has a 10 percent or more ownership in a brewery has to be vetted by the ABC [Alcohol Beverage Control] and provide detailed personal financial information to the TTB [Alcohol and Tobacco Tax and Trade Bureau],” she says. “You could end up potentially losing your license by selling to somebody who isn’t going to be able to hold ownership.”
Changing your business entity, from a corporation to an LLC, for example, is also a complicated process that involves a lot of paperwork and expense.
“The most important piece is knowing what you’ve gotten yourself into, so at least you can make an informed decision,” Moon says. “The more you can think about these things in the beginning, the better off you’ll be in the long run.”
Protecting intellectual property
Brands and protecting those brands are an essential part of doing business for a brewery owner, especially as the craft-beer industry becomes more and more crowded. Claiming your brewery’s name, as well as all beer names and logos, is critical.
“As soon as you know that nobody else is using that name, you need to file a trademark on it then and there,” Moon says. “There are so many issues that could have been avoided if people were really diligent and paying attention.”
Moon notes that trademarks and copyrights are national—if you have a national brand—which doesn’t necessarily mean that your beer is sold nationwide.
“Send beer to the World Beer Cup? Go to festivals out of state? Go to GABF every year? Those things all help make you a national brand, whether or not you’re distributing out of state,” Moon says. “If your beer is out there in multiple states—whether it’s competitions, festivals, or collaborations—all those things are valid for helping you get a federal registration.”
Moon recommends searching the federal trademark database as well as conducting a general Internet search for every brand that you’re considering.
“Beer Advocate, Untappd, and Rate Beer make it really easy,” Moon says. “If someone has already used a beer name, some beer geek somewhere has surely rated it online.”
Maintaining a safe, productive work environment
Breweries are unique businesses in that they often involve both a manufacturing side with beer production as well as a hospitality component in a restaurant, tasting room, or retail. They also often involve full-time employees, nonexempt hourly employees, and sales staff, who are all paid differently according to both state and federal regulations.
“And then you have to navigate which one trumps which, and it can get very complicated very quickly,” Moon says.
“There are also a lot of safety precautions and rules and regulations you have to follow based on the number of employees you have and what those employees are doing.”
It’s also important to set and enforce standard workplace policies, such as how alcohol is handled on the job, although Moon doesn’t always recommend—especially for smaller breweries—formalizing these policies in an employee handbook.
“The laws change frequently, so you have to keep [an employee handbook] updated,” Moon says. “And you have to enforce your policies consistently across all employees because it can also be used against you.”
Doug Dayhoff, president of Indiana-based Upland Brewing, also recommends a consistent, common-sense approach to managing employees and workplace culture, whether or not it’s formally codified.
“When you are small and growing, that sort of administrative infrastructure is difficult to afford,” Dayhoff says. “Somewhere along the way we grew up enough to put an employee handbook together, and we continue to improve upon it and try to maintain policies where workplace safety as well as professionalism are paramount.
“For us that means, when you’re on the clock, you’re not drinking beer, other than for sensory purposes,” he says. “It’s also a work hard/play hard culture, so when the clock’s off, everyone can have a shift beer if they choose or get together for a few beers.
“It comes down to professionalism and having the right team in place and setting the right tone through your culture so that people understand why those policies exist.”
Thoroughly reviewing distribution contracts
Distribution laws vary by state, but most favor the distributors when any issues arise.
“You need to know what you’re signing up for when you go into these contracts, and in a lot of states you’re signing up for life,” Moon says. “If you want to get out just because you don’t like them anymore, then you have a real problem.”
Having an attorney who’s well versed in franchise law review any contracts before signing can go a long way toward preventing future conflicts.
“One of the biggest things to be aware of is that your state franchise law, if there is one, will trump whatever is in the contract,” Moon says.
“It’s very easy during the early romance days to fall in love, but the distribution relationship is a marriage,” says Dayhoff. “Both sides can wake up on the wrong side of the bed some days, and both might let each other down at some point. You’ve got to have that commitment at the highest level between the brewery and the ownership and management of the distributor that you’re all in it for the long haul.”