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Need-to-know regulations

All the regulations below can be complied with, but the company may need a securities attorney to navigate them (this is a very specialized area of law, so make sure you find someone who has done securities before), and someone to assist with licensing. The company will also need to seek advice from an accountant or CPA to ensure that the company, the founders and the investors or creditors are aware of applicable tax consequences.

Securities laws

A familiar relationship with an investor does not automatically exempt the company from following all applicable securities laws. These laws and regulations apply whenever the company is selling a piece of itself to an investor, and that includes friends and family. Who the investors are, where they live and how much they are putting into the company will determine exactly what type of disclosures the company has to make, which government agencies the company has to notify about the sale and how much of an investment the friend or family member is allowed to make.

A one-page “Company agrees to sell 10 shares to rich uncle” is generally not going to be sufficient, especially if the proper filings were not made with the state and federal agencies. This is important because if the rules are not followed correctly, you may be personally liable for the whole amount of the investment.

Alcohol licensing laws

Both TTB and your state alcohol licensing board will need to approve your application to manufacture and sell beer. Both of these agencies will need to know where the funds are coming from, and all the funds coming into the business will need to be accurately documented.

If you are operating under a three-tier system (manufacturers, distributors and retailers must remain in separate and distinct tiers), then your state agency may need to know who is funding the business and that the lines between tiers have not been impermissibly crossed. The TTB also wants to see proof of your source of funds to ensure that the business is not a front for laundering drug or terrorism money.

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If the company’s organizational documents state that the owner put in $3,000 in cash, the owner in question will need to prove that the $3,000 was actually cash that came from their personal bank account. If the money was a loan from their parent(s), that will need to be documented in a promissory note as well for the government agencies to review. And if the company did a capital raise and brought on investors, proof of the number of investors, their identity and the amount of ownership will need to be reported to both agencies. If an investor is a company (LLC, corporation or partnership), the agencies will require disclosure of the investor’s status as either shareholders or members as well.

All the state and federal restrictions should be discussed with any potential investors prior to taking their money. All investors should be warned that if the investor does not pass the state and/or federal background checks, their money will be returned and they will not become a member or a shareholder.

Community property laws

Some states are considered “community property states” and have special rules about who owns what when a couple gets married and possibly divorced. By way of a generalization, if you live in a community property state and if the business is started with income that either spouse earned during the marriage, the “non-owner” spouse may still have up to a 50 percent ownership interest in the owner-spouse’s business. This applies even if the non-owner spouse’s name is not listed anywhere in the business documents. If the owner spouse dies, or the marriage ends while the business is viable, the court has the discretion to force the owner-spouse to allow the non-owner spouse to receive an interest in their own name or to receive a cash payment instead. Make sure to at least discuss these types of issues with your spouse and your attorney.

Tax issues

It’s a good idea to assume that there will be tax consequences any time the company brings on funds. Personal loans from friends and family should be shown to an accountant or CPA to review, especially for interest rate purposes.

A lender will usually be paying a tax on the interest earned as income. For a loan to be legitimate, there should be a reasonable interest rate, and if no interest rate is listed the IRS will provide one, and then tax the lender on that interest rate.

When deciding to bring in investors, whether family and friends or through an established round, how the investment is set up and how the company will pay the investor back will all have tax consequences. In LLCs and S-Corps, all the investors should be reminded that any profits will be taxed as income on each member or shareholder’s personal tax returns, even if the company doesn’t provide an actual cash distribution. Since brewing is such a cash-heavy business, there may be multiple years in which the company is technically showing a profit that the members/shareholders get taxed on, despite not actually have the cash to cover those taxes, since the company needs to reinvest that cash to grow.

In addition, if the company is taxed as an S-Corp (ask your accountant!), the company will be restricted in the type of investors it can have (generally only living, breathing persons who live in the United States), and the types of investment preferences it can offer. S-Corps must treat all investors the same, so if the company has $100 to distribute and has a 60 percent owner and a 40 percent owner, the first owner gets $60 and the second gets $40. This can make it difficult to bring on investors since the company can’t offer higher payments up front to make up for the risk of early investing.


It should go without saying that anytime the company brings on creditors or new investors, the internal documents should be reviewed for any necessary clean up. Corporations should have bylaws, possibly a shareholders’ agreement and minutes documenting the initial formation decisions including who is in charge, who gets to sign documents and any restrictions on duties. LLCs should have an operating agreement and the initial documentation regarding who is in charge and has signing authority. In either case, large decisions (loans, leases, etc.) should have written approval, and yearly meetings documented if required.

All internal agreements should be reviewed for accuracy and any need to be updated prior to new creditors or new investors coming in.

Whether it be a loan or an equity investment, the agreement between the company and the creditor or investor should be documented in writing and signed. The company should document the approval by the members, directors or managers (whoever has approval power) for the decision to bring on a loan or new members/shareholders.

Finally, all state and federal agencies should be updated, including the state alcohol licensing board, the TTB, the Securities and Exchange Commission (“SEC”) and the applicable state agency that regulates securities. Check with a securities attorney for any rules and notifications that apply to the specific raise conducted.