Start-up costs can be a major obstacle for businesses looking to make their mark in the wine industry. Fortunately, the “sole proprietorship” model offers an opportunity for an ambitious business to produce their own wine without having to incur some significant start-up costs. This also provides financial opportunities for existing wineries with excess capacity. And in particular, unlike “personalized favorite” arrangement, described in a previous blog postboth parties to the mutually beneficial alternating business relationship operate as licensed and bonded wineries.

What is an alternating sole proprietorship?

In an alternating ownership relationship, a “host” (the “Host Winery”) and a “tenant” (the “Alternative Owner”) share manufacturing space owned (or leased) by the Host Winery. In one of his Industrial circulars, the Department of the Treasury, Alcohol and Tobacco Tax and Trade Bureau (the “TTB”) describes the alternating ownership arrangement as “two or more persons or entities taking turns using the same space and the same equipment to produce wine. In almost all situations, an existing landlord-owner of a winery premises under bond agrees to rent space and equipment to a new owner. Essentially, this amounts to a small winery, with the owner alternating, operating within a pre-existing winery. For the host domain, the alternating ownership relationship holds the promise of facilitating the monetization of excess space and capacity.

Differences Between Alternate Sole Proprietorship and a Custom Crush Agreement

Unlike the customer in a custom crush agreement, an alternating owner is a separately bonded winery and is responsible for its own production, recordkeeping, registration, labeling and taxes, independent of the winery host (also a bonded winery). This model represents a collaboration of independent wineries, each responsible for their own winemaking practices and regulatory obligations. The term “alternating” applies because two or more licensed and bonded owners alternate the use of certain portions of the winery premises, typically the crushing and fermentation equipment, bottling equipment, and storage.

Advantages for the alternating owner

For the alternating owner, this model offers many advantages over both the custom grinding system and the stand-alone cellar. Compared to a stand-alone winery, the alternating ownership structure gives new entrants to the wine industry the opportunity to start on a small scale without the need to rent or purchase expensive facilities and equipment. Unlike a custom winemaking client, as a licensed independent producer, the alternating owner has more control over the winemaking process. With its own federal TTB permits and ABC licenses, an alternative owner can exercise direct control over its supply chain, with the ability to become involved in retail, direct shipping and wine tasting, in some case. The alternating owner must, however, engage in greater regulatory compliance than a custom pressed wine customer, due to its status as a licensed and bonded winery.

Contractual nature of the alternating business relationship

A “Work-study company agreement (“AP Agreement”), between the alternating owner and a host winery, forms the backbone of the alternating sole proprietorship structure. Basically, the AP agreement must allow the alternating owner to control portions of the host winery's facilities when the alternating owner conducts its winemaking. This makes the AP agreement operate in some ways like a lease, rather than a services agreement or other type of commercial agreement. Typically, the alternating owner would not pay for services based on gallons of wine or cases of wine produced, nor would the host winery perform the wine making service without the alternating owner's oversight. Instead, the AP agreement should establish that the alternating owner controls the winemaking process, including the bottling and storage of the wine, as well as the management of the business. The AP agreement should also allocate risks and responsibilities similar to a landlord/tenant relationship. In exchange for offering its premises, on an alternating basis, to the alternating owner, the host winery may adopt a triple net lease approach that limits its potential liabilities and expenses associated with the winery's premises. AP agreements often also address the use of employees of a host winery by the alternating owner throughout the winemaking process, and such an arrangement may be viable in the eyes of the TTB as long as it remains clear that the alternating owner controls its own winemaking.

Conclusion

The alternating ownership relationship represents a key facet of the wine industry that provides a symbiotic opportunity for both pre-existing wineries and aspiring entrants to the industry. There are, however, complex regulatory and contractual issues to consider. The experienced wine lawyers at Rogoway Law Group are here to help you! Please do not hesitate to contact us with any questions or if you would like schedule a free consultation.