7 Things To Know Before Starting a Micro-Distillery Business

"Craft" spirits seem to be all the rage these days, as is the idea of owning a "craft" distillery. Let's face it, who wouldn't want to have their very own micro-brewery or micro-distillery business?  The idea of making your very own unique alcohol brands, bringing joy to your customers, and making money doing it... sounds like the very definition of the American Dream to many aspiring business owners.  And, for many people, this dream can indeed become reality.

However, before deciding to produce that fantastic new brand of Brandy you are contemplating, you (and your lawyer) should consider the answers to the following seven questions:

Q: How long does it take to get from having a business plan for the "craft" distillery to actually producing and selling alcohol?

A:  Expect the entire process to take at least 18-24 months. The length of time involved is due to having to achieve logistical objectives (including setting up the business structure, renting out a space, hiring employees, etc.) as well as regulatory objectives at the federal, state, and local levels. Be well-prepared for unexpected delays. There is always a degree of unpredictability involved with starting a new business, so, plan and budget accordingly!

Q: How much would it cost to open a successful craft distillery?

A: Based on my own research, I would recommend a minimum preliminary budget of $350,000 - $500,000, which includes projections for hiring a minimum number of employees, renting premises, spending money on inventory and product development, and purchasing operational equipment, as well as covering various permit application fees and legal fees as a result of dealing with federal, state, and local officials.  

Q: What legal objectives must be achieved in the course of opening a distillery?

A: There are two main categories of legal tasks involved with opening a distillery: I shall call them logistical objectives and regulatory objectives.

 “Logistical” legal objectives would include tasks that could also apply to several other types of businesses -- things like starting your own corporate entity dedicated to the future distillery, drafting various business forms and employee contracts with enforceable non-compete clauses, registering your trademarks with the federal trademark office, and complying with corporate formalities of your state.

 “Regulatory” legal objectives, on the other hand, include liquor-specific items such as mandatory licensing and compliance requirements, which can be further broken down into federal, state, and local requirements.

Q: What legal objectives must be achieved at the federal level?

A: Before your distillery is legal, it is necessary to achieve a variety of objectives at the federal level, including 1) successfully filing for a federal distiller’s permit, 2) successfully filing for trademark protection, and 3) successfully filing for approval of  all original products (for public safety reasons).

More than likely, the application process for a distiller’s permit from the Alcohol and Tobacco Tax and Trade Bureau (TTB) will prove to be your most involved and time consuming objective.  While the process itself is relatively straight-forward, it does involve what is, essentially, a full background check to insure that the applicant (and his/her family, company, and investors) is a fine, upstanding citizen.  Further, the Bureau will investigate the safety and security of your proposed facility, and the applicant will be required to demonstrate that the facility is adequate for the stated purpose, and that it is protected against fire and theft, among other possible hazards.

I would recommend leasing or purchasing premises prior to initiating the federal application process.

Q: What legal objectives must be achieved at the state level?

A: States have administrative and criminal penalties for manufacturing and/or selling liquor without a license. For example, New Mexico law, NMSA 1978, section 60-7A-7, makes it a felony offense “for any person other than a licensed distiller or rectifier to manufacture any spirituous liquors…”  Thus, it is critical to obtain the appropriate state license in addition to obtaining the federal permit. While waiting times and complexity of the process vary by state, to be safe, plan for at least a 6-month waiting period after the state process has been initiated before the state permit is granted.

Q: What legal objectives must be achieved at the local level?

A: Whether the new distillery is run on County or Municipal land, dealing with local officials, including fire marshals, code inspectors, and law enforcement authorities, may present its own unique set of challenges. Ensuring compliance with the applicable zoning laws is critical to the success of the project, since non-compliance can result in your distillery being shut down before it ever begins production – despite having all the necessary state and federal permits. It is important for the business owner to maintain open channels of communication with the authorities in order to anticipate and proactively resolve local issues before they truly become a problem.

Q: Are there any other legal questions that haven’t been addressed above?

A: Yes, many. For example, if you are planning on raising capital from investors, then it is -- critically -- important to comply with the applicable State and Federal Securities Laws. The definition of a “security” is very broad and is not limited to shares of stock; naturally, it incorporates LLC and partnership interests.  Because non-compliance with Securities laws is likely to lead to severe administrative, civil, and/or criminal penalties, it is important to consult with an attorney before you begin your fundraising efforts.

I hope the above article does not deter you from your business ventures. Just remember, making your own liquor is Serious Business, and Serious Business often requires Serious Planning -- which, in this case, should most definitely include retaining an attorney!