***Brewers need to know a lot about regulation to function everyday. Whether you have a legal team or not, it is vital to understand what the TTB requires of your brewery. I have asked Danielle Rodabaugh of SuretyBonds.com to stop by and talk about what types of surety contracts a brewer might need to know about. Thanks to Danielle for the following post.***
Whether you’re looking to start up a new brewery or have been working in the industry for decades, you’ve probably heard that you need to purchase a surety bond before your enterprise can be legally licensed. Government agencies that regulate breweries typically require them to provide brewer bonds to ensure all taxes are paid appropriately.
Brewer bonds are a specific type of license and permit bond used to guarantee compliance with licensing laws and other relevant industry regulations. Brewery surety bonds are known by a number of aliases, including alcohol tax bonds, liquor license bonds, ATF bonds (short for the state Alcohol, Tobacco and Firearm agencies that might require them) and TTB bonds (short for the federal Alcohol, Tobacco Tax and Trade Bureau).
Each alcohol bond that’s issued is a legal contract that binds three entities together.
- The principal is the business or individual that plans to sell, manufacture or warehouse beer.
- The obligee is the government agency that requires the bond to ensure taxes are paid appropriately.
- The surety is the insurance company that backs the brewer’s future performance with a financial guarantee.
If a bonded brewery fails to pay taxes appropriately, the bond amount can be used to pay the owed taxes as well as any other fees that might accompany the unfulfilled payment. Claims on brewery bond contracts are rare, but without the bonding requirement, state agencies would lose the benefit of the surety’s prequalification standards. But what does this mean?
Because surety providers intend to avoid losing money on claims, they carefully review applicants before issuing brewers bonds. To put it simply, the bonding process keeps individuals who lack the financial capacity to fulfill their tax obligations from getting a surety bond. Without the required bond, breweries cannot qualify for the necessary licenses and permits. Thus, unqualified individuals are kept from working in the industry if they lack financial stability.
Another barrier to getting bonds is their costs, which depend on a number of factors such as the bond amount and the applicant’s financial credentials. The amount of surety bond protection a brewery must provide typically depends on the enterprise’s anticipated tax liability for a full calendar year. Brewery owners who have good credit should expect to pay a rate that’s 1 to 5 percent of the bond amount, and those with poor credit should expect a rate that ranges from 15 to 25 percent of the bond amount. So if a brewery is expected to pay $10,000 in taxes during a year, a $10,000 surety bond will be required. Those with good credit will pay $100 to $500 while those with bad credit will pay $1,500 to $2,500.
Before applying for a bond, brewery owners should check with their state, county and city government agencies to verify bonding requirements. Failing to understand which bonding regulations apply to your brewery could hinder the licensing process. This guide should help you on your way.
Danielle Rodabaugh is the chief editor at SuretyBonds.com, a surety provider that issues bonds to working professionals across the nation. As a part of the company’s educational outreach program, Danielle writes articles that help new business owners better understand how surety bonds affect the business licensing process. You can keep up with Danielle on Google+.