In the alcohol beverage industry, a common arrangement that many producers consider is the alternating proprietorship. This legal structure allows multiple beverage producers to operate out of the same facility while maintaining their independent businesses. For those in the wine, beer, spirits, sake, hard cider, or mead industries, understanding how an alternating proprietorship works, the laws that apply, and the pros and cons of this setup is essential for ensuring compliance and maximizing business opportunities.
What is an Alternating Proprietorship?
An alternating proprietorship (“AP”) is a legal arrangement in which two or more alcohol beverage producers share the same physical production facility. In an AP relationship, the established company that owns or controls the production facility is typically called the “host” whereas the company seeking to rent or use the space is called the “tenant.”
Despite sharing production space, each producer operates as an independent business with distinct operations, including production, labeling, and distribution. This allows each producer to avoid the high costs of maintaining a separate facility while still complying with regulatory requirements.
Per the Alcohol and Tobacco Tax and Trade Bureau (“TTB“), an alternating proprietorship can involve various types of alcohol production. The structure is designed to provide operational flexibility while ensuring that each business meets regulatory standards.
Can Alternating Proprietorships be used for Wine, Beer, and Spirits?
Yes, alternating proprietorships can be used for the domestic production of wine, beer, and spirits. It may also be used for domestic hard cider and sake production. Each individual producer must comply with federal and state licensing requirements, such as obtaining a TTB permit for alcohol production, and adhere to specific regulations for labeling, production, and distribution.
How Does an Alternating Proprietorship Work in Practice?
In practice, an alternating proprietorship arrangement generally requires clear boundaries and a set schedule for the use of the shared facility. Each producer typically has access to the facility on specific days or at specific times, ensuring that there is no overlap between production runs. The ownership and operation of each producer’s production processes, formulations, label applications, and recordkeeping are maintained separately, but both parties will share the same production space.
Key considerations for operating under an AP arrangement include:
- Scheduling: The shared use of the facility must be managed to avoid production conflicts.
- Licensing: Each producer needs to secure their own federal permit and state licenses to operate within the shared facility.
- Compliance: Each producer must ensure that their individual production process adheres to the relevant regulations, including labeling, advertising, and tax compliance.
- Intellectual Property: Intellectual property (“IP”) rights—such as trademarks, logos, and trade secrets—are typically owned by the individual producer that created them, unless otherwise specified in the agreement.
What Laws and Regulations may Apply to Alternating Proprietorships?
Several laws and regulations govern the operation of an alternating proprietorship. These rules are designed to ensure that the producers adhere to the regulations set forth by federal, state, and local authorities.
- Federal Laws: The TTB oversees alcohol production, and each alternating proprietor must be licensed separately by the TTB. These include Brewer’s Notice (Form 5130.10) for breweries, Distilled Spirits Plant (“DSP”) permits for distilleries, and Bonded Winery permits for wineries. Producers must also comply with the Federal Alcohol Administration Act (“FAA“), which governs production, labeling, and distribution of alcoholic beverages.
- State and Local Laws: In addition to federal regulations, state authorities regulate alcohol production. For example, agencies such as the New York State Liquor Authority (“SLA“) or the California Department of Alcoholic Beverage Control (“ABC“) may issue state-level alcohol beverage licenses. State-specific licensing and compliance standards, including those for alcohol taxation and labeling, must also be met.
- Taxation and Reporting: Each business under an alternating proprietorship must comply with excise tax regulations and ensure the proper reporting of production and distribution. This includes filing TTB Form 5100.1 for breweries or equivalent documents for other beverage types. For more information, see our post Understanding Excise Taxes in the Alcohol Beverage Industry: What Wineries, Breweries, and Distilleries Need to Know.
What Documentation is Required for Alternating Proprietorships?
Running an alternating proprietorship requires a variety of legal agreements to outline the roles, responsibilities, and financial arrangements between the involved parties. Key contracts include:
- Alternating Proprietorship Agreement: This contract specifies the terms of the arrangement, including scheduling, financial responsibilities, and compliance with applicable regulations. It should detail the shared use of equipment, responsibility for maintenance, and liability (among other items).
- Diagram: An accurate and thorough diagram outlining the proposed production and storage areas is required to be filed with the TTB. The diagram should also show which spaces may be shared as well as spaces that will be unique to each industry member. The diagram is a very detailed document and it is ideal to work with a professional who has been through the application process in the past to ensure that no stone is left unturned.
- Ownership Structure: For a new company completing a TTB application, the company’s ownership structure typically must be provided along with personal questionnaires. The specific documentation that must be submitted will vary based on particular business entity and the overall ownership structure.
What Other Options Exist Apart from an Alternating Proprietorship?
While alternating proprietorships offer significant advantages, they may not be suitable for all alcohol producers. Alternatives to this arrangement include:
- Leasing or Owning a Separate Facility: This is the most straightforward alternative, but it comes with significant costs for equipment, real estate, and overhead.
- Contract Brewing or Distilling or Custom Crush Arrangements: Under a contract production or co-packing model, one company outsources its production to another. Unlike an alternating proprietorship, a co-packing relationship does not involve shared space or joint operations.
What are the Pros and Cons of an Alternating Proprietorship?
As with any business model, there are both benefits and drawbacks to an alternating proprietorship.
Pros:
- Cost Savings: Shared space and equipment can drastically reduce startup and operational costs.
- Flexibility: Producers can schedule production to suit their needs while leveraging the infrastructure of an established facility.
- Allows for a Compliant Model: The model allows producers to comply with TTB and state alcohol production regulations without needing to build out a full production facility.
- Access to Established Networks: Many alternating proprietorships benefit from the existing relationships the host facility may have with distributors, retailers, and suppliers.
Cons:
- Limited Control: Tenants in an alternating proprietorship relationship may have limited control over the physical space and equipment, which could lead to scheduling conflicts or other operational challenges.
- Legal Complexity: The contractual and legal requirements can be complex, and failing to adhere to regulations can result in penalties or license revocation.
- Branding Conflicts: When sharing production space, it is essential that producers have clear brand separation to avoid any confusion for consumers or retailers.
- Risk of Liability: The shared nature of the space may create liability issues, especially if one producer’s actions cause harm or violate regulations.
How can Lindsey Zahn P.C. Assist with an Alternating Proprietorship?
Navigating an alternating proprietorship in the alcohol beverage industry can be an effective way for small producers to share resources, reduce costs, and access established infrastructure while maintaining operational independence. However, there are important considerations regarding ownership, layout, usage of space, and compliance. Having a clear, comprehensive alternating proprietorship agreement that outlines all these factors will help both parties avoid misunderstandings and legal issues down the road.
To ensure your business is fully protected and compliant, it is prudent to work with an experienced alcohol beverage attorney who can guide you through the intricacies of setting up and managing an alternating proprietorship. A legal professional can assist you in drafting agreements that protect your rights and interests as well as assist throughout the application process. Reach out to Lindsey Zahn P.C. for an introductory meeting to discuss your project at 929-ZAHNLAW or info@zahnlawpc.com.