For many new and growing alcohol beverage businesses, one of the biggest challenges is the cost of establishing and maintaining a production facility. Purchasing or leasing a dedicated facility, acquiring production equipment, and building out premises that satisfy federal and state requirements can require a significant investment—particularly for a business that is still developing its production volume.
An alternating proprietorship can provide another option.
An alternating proprietorship is an arrangement in which two or more separately owned businesses take turns using the same production premises and, in many cases, the same equipment. Rather than each business maintaining its own fully equipped facility, the businesses share the physical space according to an arrangement approved by the Alcohol and Tobacco Tax and Trade Bureau (“TTB”).
Alternating proprietorships can be used in the wine, beer, and distilled spirits industries, although the specific requirements differ depending on the type of operation.
What Is an Alternating Proprietorship?
In a typical arrangement, one business serves as the host and another business serves as the tenant or alternating proprietor. The host has an established alcohol production facility and agrees to allow another producer to use some or all of the premises and equipment at designated times.
Importantly, an alternating proprietorship is not simply paying another producer to manufacture your product.
The tenant is generally a separate TTB-regulated business and must qualify for the appropriate federal authorization. The tenant maintains responsibility for its own production and regulatory obligations and, depending on the type of operation, must maintain appropriate records, obtain required label approvals, and comply with applicable tax requirements.
For example, TTB describes a brewery alternating proprietorship as an arrangement in which a host brewery rents space and equipment to a tenant brewer. The tenant brewer produces its own beer, maintains the appropriate brewery records, labels its beer with its own name and address, obtains the necessary COLAs, and pays the applicable tax when the beer is removed from the brewery.
In other words, the tenant is not simply hiring the host to make its product. The structure is intended to allow separate businesses to operate as producers while sharing a physical facility.
Why Consider an Alternating Proprietorship?
1. Lower Upfront Capital Investment
One of the most obvious benefits is the potential to reduce the capital required to enter the alcohol production business.
A new producer may not need to purchase or lease an entire facility, install every piece of production equipment, or build out a facility from scratch. Instead, the business may be able to utilize an existing facility and equipment.
For a startup or small producer, this can make it possible to begin production at a much smaller scale.
2. Access to Existing Equipment
Production equipment can represent a substantial investment. It can also be time consuming to source equipment.
Depending on the type of product and operation, an established facility may already have fermentation tanks, bottling or packaging equipment, storage areas, processing equipment, or other infrastructure that a new business would otherwise have to purchase.
An alternating proprietorship can therefore provide access to equipment without requiring the tenant to independently acquire all of the same infrastructure.
3. A Way to Test and Grow a Business
An alternating proprietorship can be particularly attractive to a business that is not yet ready to commit to a permanent standalone facility.
For example, a new wine, beer, or spirits brand may have ambitious plans but relatively modest initial production needs. Establishing a fully independent production facility may not make economic sense at the outset.
Using an existing facility can provide an opportunity to establish the business, develop production processes, build a customer base, and increase production volume before deciding whether a dedicated facility is necessary.
4. Better Utilization of Existing Facilities
Alternating proprietorships can benefit the host as well as the tenant.
An established producer may have unused production capacity or equipment that is not being used consistently. Bringing another producer into the facility can allow the host to make productive use of excess capacity as well as be another source of revenue for the host.
This can create a mutually beneficial arrangement: the tenant gains access to an established facility, while the host may generate additional revenue from space and equipment that would otherwise sit idle.
5. Flexibility for Growing Producers
Production needs can change significantly as an alcohol business grows.
A business that starts with relatively small production runs may eventually need additional space, equipment, or production days. An alternating proprietorship can provide some flexibility during that growth period.
It may also allow a producer to scale its operations without immediately making the substantial investment required to establish an entirely separate facility.
Alternating Proprietorship vs. Contract Production
One of the most important considerations is understanding the difference between an alternating proprietorship and a contract production or custom crush arrangement.
The two structures can look similar from the outside because both may involve one business using another business’s facility. From a TTB perspective, however, they are not necessarily the same.
In a contract production arrangement, one business generally hires another producer to manufacture the product on its behalf.
In an alternating proprietorship, the tenant is intended to operate as a producer in its own right. TTB’s guidance emphasizes factors such as who owns the ingredients or raw materials, who controls production, who holds title to the product during production, and whether the tenant is actually conducting production rather than simply outsourcing it.
This distinction matters because the regulatory obligations and appropriate federal permit structure can differ.
Businesses should therefore determine the appropriate structure before beginning operations, rather than assuming that an arrangement can simply be characterized as an alternating proprietorship after the fact.
An Alternating Proprietorship Is Not Simply an Informal Shared Space Arrangement
Another important point is that an alternating proprietorship is not simply a matter of two businesses agreeing to share a facility.
TTB approval and documentation requirements apply, and the specific requirements depend on the type of alcohol operation.
For example, TTB’s current guidance identifies an alternating proprietorship agreement as part of the documentation required for wine, brewery, and distilled spirits operations. Depending on the circumstances, additional documentation may include updated premises diagrams, bond-related documentation, and requests for alternate methods or procedures.
The physical premises and the parties’ respective operations also need to be structured appropriately.
For breweries, for example, TTB has specifically addressed the importance of the tenant brewer actually having access to the brewery premises and operating independently from the host. TTB has also cautioned against arrangements that are actually contract brewing arrangements or that are structured primarily to obtain tax benefits improperly.
The agreement between the parties is therefore only one piece of the overall regulatory structure.
Don’t Forget State Licensing Requirements
Federal approval is only one part of the analysis.
An alternating proprietorship may also require consideration of state alcohol beverage licensing laws, local requirements, tax registrations, manufacturing requirements, and other regulations applicable to the particular facility and business.
State laws can vary considerably, and a structure that works from a TTB perspective may not automatically work under the laws of every state in which the business operates.
Before entering into an alternating proprietorship, both the host and tenant should understand not only what TTB requires, but also what their applicable state and local authorities require.
Is an Alternating Proprietorship Right for Your Business?
For the right business, an alternating proprietorship can provide a practical way to access production space and equipment while reducing the investment required to establish a standalone facility.
It may be particularly worth considering for:
- New alcohol beverage businesses entering the market
- Small producers with limited initial production volumes
- Businesses looking to expand production without immediately building a new facility
- Established producers with unused production capacity
- Producers that need access to specialized equipment
- Businesses evaluating whether and when to establish a dedicated production facility
At the same time, an alternating proprietorship is a regulated arrangement—not simply a lease of space or equipment. The parties need to carefully consider the proposed operations, ownership of product, production responsibilities, premises configuration, federal permitting, and applicable state requirements before moving forward.
How Lindsey Zahn P.C. Can Help
Lindsey Zahn P.C. works with alcohol beverage businesses on federal and state regulatory matters, including the establishment and modification of production operations.
If you are considering an alternating proprietorship, we can help evaluate the proposed structure, identify the applicable TTB requirements, assist with the federal permitting and documentation process, and help address related state alcohol beverage licensing considerations.
Whether you are an established producer with unused capacity or a new brand looking for a way to begin production without immediately investing in a standalone facility, an alternating proprietorship may be an option worth exploring.
Contact Lindsey Zahn P.C. to discuss your proposed alternating proprietorship relationship and learn how we can assist with your licensing or permitting needs.
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Disclaimer: This article is provided for informational purposes only and does not constitute legal advice. Reading this article does not create an attorney-client relationship. Because every situation is unique, you should consult qualified legal counsel regarding your specific circumstances.