Does it Matter What's in an Operating Agreement for a Brewery or Distillery?

If you’re a savvy business person, you likely understand the importance of having an operating agreement for your corporate entity, especially if your new business endeavor is owned and operated by multiple individuals.

Most people who start a new brewery or distillery have a litany of questions involving entity formation, primarily on whether they should file as an LLC or for corporate status. However, regardless of which entity you choose, you should have a legal contract among the members or shareholders, detailing the roles and responsibilities of all involved. For corporations, these documents are called “Articles of Organization” and must be filed with the Secretary of State if filed in Ohio. For LLC’s, this document is called an “Operating Agreement” and is not required in Ohio, but is certainly recommended. Be sure to consult with a competent attorney licensed to practice in the state you wish to file, as these requirements can vary greatly from state to state.

Two mistakes that we often see are where new breweries and distilleries either use a template or hire a lawyer without experience in federal alcohol law. When applying for a federal permit with the Alcohol & Tobacco Tax and Trade Bureau (“TTB”), you will be required to submit either an Operating Agreement or Articles of Organization as part of your application. As such, there are several considerations to keep in mind while drafting these documents.

First, consider how your “End Game” provisions are structured. For example, a common provision in these agreements calls for a member’s or shareholder’s interest to automatically transfer to a spouse or relative upon death or disability. While this clause usually makes sense in the business world, it is important to understand that TTB has strict rules about who can have ownership interest in a brewery, and especially in a distillery. If the surviving spouse of a member or shareholder is found to be ineligible to have ownership by TTB (for reasons such as having a criminal record or prior permit revocation), TTB may take administrative action, which could include revoking the permit.

Another consideration is to have a clearly laid out provision accounting for signing authority. Although this may be seemingly redundant, TTB can be surprisingly strict about provisions that grant signing authority to members, and often require this to be clear and unambiguous. Simply put, this is a common issue in the TTB permit approval process, and including a brief provision clarifying signing authority will certainly help to avoid last minute delays during the federal permit approval process.