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Am starting a wine investment business and am wondering how best to legally set up the company (what type of entity and license)

Los Gatos, CA |

I've been investing in wine for few years now (buying wine and then reselling a few years later at auction). Because I've been doing this myself (not through any corporate entity), I always pay sales tax on my initial purchase, even though I'm not the ultimate consumer. Hence, I'd like to see if I can set up a corporate entity so as not to pay the initial sales tax (it would be paid by the final consumer, who purchases the wine at auction). Also, I would hope I can avoid any 'liquor license' fees as I'm also not selling the wine directly to the consumer, but rather through an auction company for a fee. Can I just go ahead and set up an LLC or S-Corp, or are there more complications because this involves alcohol?

Many thanks for any advice or guidance on next steps!
John.

One additional thing I should mention - at this time I'm not sure whether I'll just be investing my own money myself on my behalf, or whether I will also do this for others too. I'm not sure if those two approaches would change the approach I would use for incorporation, and whether the latter approach introduces new complexity from a legal or tax perspective. Also, if I just do this business for myself, is there any risk of the IRS or Local Tax entity viewing this as not a real business etc?

Attorney Answers 6

Posted

If your company is starting out small and you'd like to pass-thru the business deductions over to your personal return and save on self-employment taxes you may want to consider using a corporation taking the subchapter 'S' election. Good Luck!!

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Asker

Posted

Thanks Michael, appreciate the advice. Yes, this sounds like the easiest way, though am still wondering if I need any license given that the product is alcohol.

Posted

If you do not want pass-through taxes, an LLC with C-Corp election will do. Otherwise, you'll want the S-Corp election.

First question: where are you paying your sales tax or VAT? This may make a difference on how to avoid that costly burden.

Second: how do you pass that cost to buyers?

Third: have you considered the steps to getting a distribution license? These can get expensive.

Sounds like you have more questions than we can answer in a forum. You would do best to get a couple lawyers on the phone.

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Posted

Thanks Todd, good advice. To answer your questions, I'm paying sales tax on the initial purchase of wine in California (similar to how any customer would buy wine in a local store). When I resell the same wine a few years later (say at www.klwines.com auctions, for example), the person who has the winning bid on the wine pays sales tax, again similar to how any customer would pay sales tax for buying wine (auction or otherwise) in their state, for their consumption (they are the end-customer, if you will, consuming the wine). The store, www.klwines.com, for example, holds my wine on consignment until the sale is made, and they process the sale and arrange the auction for a fee. Hence, in some ways, I might be considered a 'distributor' I suppose, so perhaps I would need such a license? Such a pity that this stuff needs to be complicated and expensive to do, alas ;-) Anyways, thanks for the advice. John

Posted

I usually recommend that clients ask their accountant as to what entities they should use for a new business. Lawyers are not accountants and should not give accounting advice. The same is for accountants, they should not be giving legal advice or performing legal work. I would ask your accountant as to what entity they recommend. Once you get your answer than consult with a business lawyer who can setup the entity for you. Good luck.

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Michael Leo Potter

Michael Leo Potter

Posted

The type of Entity is a Legal Question. The tax choice of subchapter in the IRC is an Accounting Question. For start-up small business, the choices are easy.

Posted

I don't know the answer to the sales tax question. I would ask an accountant. As for the alcohol license issue, you may need a license, depending on the quantity of wine you are selling and how you are selling it and where. I represent a client in the spirits business, but I am not positive on the answer for wine, as it is treated differently than wine.

I would be happy to discuss this further with you.

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Asker

Posted

Thanks for the input, Paul. I'd likely be selling about $30,000 value in wine per year or thereabouts of about 400 bottles (give or take 100), though that might increase over time if I really start to do this not just for myself but for clients too. I would be selling the wine on consignment through public wine auctions. The end-customers/purchasers of the wine pay the auction house (like a store) and pay sales tax. The auction house then pays me the proceeds a couple of weeks later on each lot, less a commission/fee for the listing. Thanks, John

Paul Bradley Schroeder

Paul Bradley Schroeder

Posted

John, I would need to review the relevant statutes and regulations, but if you are doing this for other people, I'm 90% sure you need an ABC license. If you are only doing it for yourself, and are using an auction house that is appropriately licensed you may be OK, but, again, I would want to do the research to be sure. The rules are arcane. Paul

Posted

As you may know, there are several "wine funds" out there in the investment marketplace for those interested in generating returns from such investments. But forming a corporation solely for the tax reasons you've stated doesn't sound quite right to me. On top of that, you have the laws of other states to be concerned about, given that some may require licensure and some may not for "resale" of the wine. You should speak with a CA based accountant and then with an attorney to ascertain the best possible options out there for your objectives.

The foregoing is not legal advice nor is it in any manner whatsoever meant to create or impute an attorney/client relationship.

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Posted

This is a very delicate issue. You want to start a business that maybe you will have private placement in the Business?the OPM system? You can go ahead and just start a business base to our advice paying a few dollars in on line service BUT those on line services (trust me) are non personal and give u less than u really need . In the end u will need a lawyer to take u out of a mess. We understand people try to get an advice and just go to "do it yourself" business . If you have a plan to use your knowledge in the wine field to make money You know how many people that knew that business lost money. Not because they were stupid or non serious BUT because they tried to do everything cheap and without lawyers and accountants." People don't plan to fail they fail to plan.".Since 1981 Economist I can attest to that! Take my advise if u really want to use OPM and do something serious spend the money or get a counsel to help u . You need to spend money to make money. A good attorney that REALLY knows business can help u.
As a California Attorney and one of the very few that are Fraud Examiners ( CFE member of the Association of Certified Fraud Examiners) I can help you with Starting and developing a good solid business . http://karamanlispowers.com

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