Nano brewery basics

The term “nano brewery” may be a fairly recent addition to the craft brewing lexicon, but the concept of small breweries with a pint-sized brew length is nothing new. Although Anchor Brewing in San Francisco might be considered the first American craft brewery, it was New Albion Brewing of Sonoma, Calif., that showed other entrepeneurs they could build a brewery from the ground up. New Albion opened in 1976 using a 55-gallon brewing system.

There is no denying that as total craft beer production continues to skyrocket, so does the number of breweries that are starting with smaller than traditional batch sizes. Just as the definition of “craft beer” can be a slippery subject, there is no definitive answer as to what constitutes a nano brewery. And, likewise, there is no comprehensive list or accounting for how many nano breweries are operating in the United States.

The most-widely accepted description of nano breweries is a brewery that produces in batches of three barrels or smaller. Based on that criteria, there are upwards of 300 breweries operating in the United States as of summer 2014 that would qualify as nano breweries. That would mean nano breweries account for nearly 10 percent of the nation’s craft breweries.

In the early days of the craft brewing revolution, these smaller breweries didn’t have their own category. They were simply brewers who started small. While some of those early mini-micros, such as New Albion, Thousand Oaks and Saxton – all in California – were relatively short-lived, other breweries that started on the nano scale, such as Pike in Washington and Dogfish Head in Delaware not only survived, but continue to thrive.

The fairly recent “new wave” of nanos, which began in the mid 2000’s, has seen a number of similar success stories: Two Beers and Schooner Exact in Washington, Heater-Allen and The Commons in Oregon, to name a few. For many others, it is still too soon to tell if they will be added to the roll of success stories or casualties.

There are three main models for nano breweries:

1. Proof of concept. These are started by brewers with plans for larger scale breweries, but either can’t or won’t risk the extensive capital needed for a full-sized brewery without first knowing there is a market for their beer.

2. Hobby-gone-wild or second income. These breweries are often started by passionate homebrewers who have too good of a career to abandon for the speculative future of a brewing project. These brewers keep their day job and brew mainly nights and weekends.

3. Add-ons to existing restaurant pubs. Many restauranteurs and publicans realize the value in adding house-brewed beer to their lineup, yet lack the space for a larger brewery.

There are, of course, other reasons for opening a nano brewery. Perhaps it is a “retirement project” for a brewer looking to stay busy after a long career. And, of course, there are those who think opening a brewery is an easy road to riches. Those brewers are bound for disappointment.

The capital required for starting a nano brewery may be substantially less than that needed for a larger brewery. But, the potential profits are likewise scaled back. It takes about the same amount of work to brew three barrels of beer as it takes to brew seven or 10. And nanos lack the bulk buying power that can stretch their thin margins.

No matter the reason for opening, nano breweries are businesses and as such prospective owners must choose the form their business will take.

Sole Proprietorship

This is the simplest business structure – it is an unincorporated business owned and run by one individual with no distinction between the business the owner. The upside is you don’t have to answer to anyone but yourself and all profits are yours. The downside is all of the businesses liabilities and debts are yours as well. You pay tax on any company profits on your personal income tax return. And, in the case of any legal action, you are not protected.

Partnership

In a partnership, two or more individuals share in the ownership, each contributing money, labor or something of value for their share in the company. Partners jointly share in the profits of the company and share the debts and liabilities. Profits and losses pass through to the the partners and become their tax responsibility, as do any legal liabilities.

There are three kinds of partnerships: general, limited and joint venture. In a general partnership, the portion of ownership and liability, if not equally split, is delineated in a partnership agreement. Limited partnerships allow some partners to have a limited liability and limited share of profits based on their initial investment. These limited partners are often bought out after an agreed upon time period. Joint ventures are treated as general partnerships, but, usually for a limited time. If the partnership continues long-term it must be filed as such.

The upside to a partnership is the shared responsibility, the complementary talents of a well-balanced partnership and the ability to easily add more partners. But, if a partnership is unbalanced and partners need to share profits with others they do not believe are performing equal work, discord can occur.

Corporations

A simple corporation, referred to as a C corporation is an independent legal entity owned by shareholders. The corporation itself, not the shareholders, holds all of the legal and tax liability. In the case of a lawsuit, none of the liabilities pass through to the shareholders. The corporation is taxed on its profits and shareholders are taxed on any dividends they receive from the corporation.

In an S corporation, the corporation is not taxed, the shareholders are taxed on the disbursements they receive from the corporation as well as any wages they earn as an employee of the company.

One downside of a corporation is you must answer to shareholders for decisions that you make and deal with shareholder expectations that may not be the same as yours.

Limited Liability Companies

A limited liability company or LLC provides the liability protection of a corporation, but allows profits and losses to pass through to the individual shareholders’ tax returns, which can often save money.

A downside to this tax advantage, however, is members of an LLC are considered to be self-employed and must pay self-employment tax.

It is always advisable to talk to a lawyer to determine the business structure that best suits your situation.

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