Proper business organizational planning is important in the alcohol industry. Production of any beverage has inherent risks given the fact that the beverage might become compromised in a manner that makes an individual ill. Further, by its very nature, alcohol is intoxicating and the reality is that some consumers drink to excess. These factors make the alcohol industry particularly aware of risk management, where a business identifies, assesses, and prioritizes certain risks, including the risk of litigation, with the purpose of minimizing economic loss. Ideally, risk management begins at the establishment of the business organization that will operate the winery, brewery, or distillery.
One objective of business planning is to create a shield between the liabilities of the business entity, whether it is a limited liability company or a corporation, and the owners of that entity. These owners may be individuals or other business entities. This shield is important to encourage investment in businesses, to grow the economy, and to create jobs. Without this incentive, investors would be reluctant to subject their capital to the risks associated with business operations.
The law doesn’t provide absolute protection for business enterprise owners, whether they are limited liability company or corporation owners. If owners fail to treat their relationship with the business organization properly, they could be subjected to liability. In fact, failure to operate appropriately could result in a personal liability to the owner for the obligations of the business entity if a court would allow a creditor or plaintiff in a lawsuit to “pierce the corporate veil,” accessing the pockets of the individuals or business owners behind the entity operating the alcohol producer, in this instance.
So, how does the owner of the business enterprise decrease the likelihood of having a court “pierce the veil?” It is helpful to look at factors that most U.S. courts review when a plaintiff alleges that it should be able to hold the business enterprise owners personally liable. This review could be looking for:
- Accurate and proper business records
- Maintenance of arm’s length relationship with related business entities
- Intermingling of assets between the business entity and its owners
- Lack of proper functioning officers and/or directors
- Significant undercapitalization of the business
- Treatment of business assets as if they were really the owners
- Business entity used as a facade for actual personal dealings
Lack of business formalities, as addressed above, while operating the business enterprise could cause a court to allow a plaintiff access to the pockets of the business enterprise owners.
The objective of business planning at the organizational stage and beginning operational stage will be to make sure that formalities are followed. This may mean that the distillery makes sure that its shareholders are not purchasing the still in their own name with their personal cash. Rather, cash contributions should be made to the business entity and the still should be purchased in the name of the business entity. Or, an individual that has a vineyard with hopes of opening a winery on the same site may be prudent and create two business organizations – one for the vineyard and one for the winery. The winery may have a tasting room that attracts the public to the facility. These entities would want to treat each other in an “arm’s length manner” by crafting a proper lease between the entity owning the winery/tasting room operations and the entity owning the vineyard. Fair market value for rent should be determined and even more importantly – paid. This type of activity can decrease the likelihood of subjecting a valuable asset – the real estate of the vineyard – to the liabilities of the winery.
There are many more actions that business enterprise owners can take to avoid liability risks. In addition to these, the entity will want to acquire proper commercial liability insurance for the operation. Proper insurance will not only reduce the burden of a court judgment, but will many times provide for legal representation paid for by the insurance company. Proper business formation and operation, along with insurance coverage are some of the most important ways to manage risk as an alcohol producer. Should you have any questions, please contact our office.