alcohol business structuring & FORMATION

Under the Texas Alcoholic Beverage Code, a license or permit may either be held by a “natural person” also known as sole proprietorship, or a business entity such as a “general partnership”, “limited partnership”, “corporation”, or “limited liability corporation”.  Tex. Alco. Bev. Code §§ 1.04(6) and (9), Tex. Bus. Org Code §§ 21, 101, 152, 153.  The United States Small Business Administration and the Texas Secretary of State provide a cursory overview of different business structures.  

According to the 2023 Year End Economic Report from the National Small Business Association, only 9% of business surveyed were structured as a sole proprietorship.  A limited liability company or LLC as it is commonly known is one of the most popular forms of business entities, and for good reason, because of its simplicity to establish and maintain relative to other forms of business.  Of course, whether an LLC is a best choice for your business are questions for a licensed Certified Public Accountant or a Tax Attorney in conjunction with a Business Attorney.

Although an applicant can operate a liquor licensed establishment as a sole proprietorship, there are important risks and limitations to be aware of.  Because a sole proprietorship is not a separate and distinct from the individual, see CU Lloyd’s v. Hatfield, 126 S.W.3d 679, 685 (Tex. App.—Houston [14th Dist.] 2004, pet. denied), the individual owner operating the business is personally liable for any tort or contract claims made against the business.  A sole proprietor cannot have a co-owner or partner in the business, because the liquor license or permit is privilege issued to the individual holding the permit as opposed to a liquor license or permit issued to a business entity which can have more than one owner.  See, Tex. Alco. Bev. Code §§ 6.01 and 11.03.  In fact, it is a serious criminal and administrative violation of the Texas Alcoholic Beverage Code to have undisclosed interests in a permit commonly referred to as “silent partner”.  Tex. Alco. Bev. Code §§ 11.05, 61.16, 61.71(a)(14), 101.76(a) and 109.53.  Should a sole proprietor want to sell their business, the seller could not transfer the permit to the purchaser.  See, Tex. Alco. Bev. Code § 11.03.  A buyer purchasing the equity of an LLC or a corporation on the other hand could assume ownership and control of the permit if otherwise eligible, because there has been no change in the identity of the permittee or licensee (same business entity still holds the permit, albeit with different corporate actors).

A sole proprietor can convert to another business entity without losing their existing license or permit, so long as the sole proprietor is the only owner of the new business entity, e.g. LLC, corporation, etc.  See, Tex. Alco. Bev. Code § 11.12.  Similarly, one business entity can be converted to another, e.g. LLC to Corporation, so long as the ownership is the same.  This will eventually allow a business entity to sell its equity interests to otherwise qualified purchasers.

If you are thinking of applying for an original permit, altering your business structure, or purchasing or selling an existing licensed location, it is very important that you consult with a licensed Texas Attorney experienced with Texas Alcoholic Beverage Commission laws and regulations before taking any action.