The answer: it depends. As shown in Census figures, most wineries are partnerships or S corporations. However, the organizational form selected is related to the size of the winery and needs of owners and investors, with the smallest wineries choosing most frequently between partnership and S corporation forms. As wineries become larger, their needs change and the percentage selecting corporate forms increases.
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Organization Form Determines Liability, Taxation, and Inheritance Issues
The organization form affects potential legal liability, that is, who is the person or entity liable for business debts and other claims. In addition, the legal structure dictates issues beyond liability, including how the winery interests can be transferred or inherited, how the winery is taxed, and who controls the winery. Also, the legal structure influences what is reviewed by state licensing agencies.
The Most-Used Forms
Here is a brief synopsis of the most-used organization forms.
Sole Proprietorships – From a legal standpoint, this is the least complex form. Income is taxed to the individual and the business ceases upon business termination or death of the individual. However, it does not offer the shelter from personal liability that some of the other forms provide. This choice may be more reflective of the ease with which proprietorships are formed and taxed.
Partnerships – The two major forms of partnerships are the general partnership and the limited partnership. Within these forms, partners may be either general partners, who take a place in running the business and may have personal liability, or limited partners, who have more limited liability and who may have a minor role in the business. Many investors like this form for tax reasons although some investors will only invest in C corporations to avoid pass-through income or losses. Limited liability partnerships can be established in certain professions (depending on the state) and can lead to limited personal liability for the individual partners.
Corporations – Corporations provide greater insulation against personal liability, but require more formality. Also, many investors request formal corporate structures for tax and investment reasons. The two major types of corporations are the "C" or "S" corporations. C corporation income is taxed at both the corporate level and again at the individual level when individuals receive distributions. S corporations generally have a few shareholders and the profits pass through the company and are taxed to the individual owners. Limited liability corporations may also be available and have both aspects of a corporation and a partnership, including limited individual liability, even for owners who take an active role.
Does Your Organization Form Fit Your Present Circumstances?
Determination of an appropriate legal structure takes careful thought and review of the individual circumstances and needs of those in the business. Also, your needs change and the form you started with may no longer satisfy your current goals. While it is vitally important to consider corporate form at the start of a business, it is equally as important to reconsider the form as the business grows and changes and individual circumstances change. As you can see from above, as wineries get bigger, they adopt corporation structures in higher percentages.
Are you starting a winery or have your circumstances changed? Consider consulting legal and tax advisors to help you pick the best format as the issues depend on the facts and needs of the persons involved.