With the recent rise in popularity of microbreweries in Michigan, there has been an increase in small businesses/entrepreneurs entering the hospitality industry. In addition to other off-site distributors of alcoholic beverages, such as gas stations and liquor stores, many on-site providers of alcohol such as restaurants, bars and hotels rely on the ability to do so for a significant portion of their profits. Thus, in starting a hospitality business, it is necessary to have some background knowledge of liquor law and the licensing regulations with which to comply. The law in this area varies from state to state, so specific knowledge of Michigan law is necessary if the business operates in Michigan.
The Three-Tier System
In Michigan, distribution of liquor, beer, wine and other spirits is handled by three distinct parties: 1) the manufacturer; 2) the wholesaler; and 3) the retailer. The second party, the wholesaler, is the State of Michigan, which acts as a middleman between the manufacturer and the retailer. One reason for this is to prevent manufacturers from creating exclusivity agreements with bars or stores. Other reasons include the ability to regulate liquor prices for taxation and to ensure compliance with licensing requirements.
Typically, a business (or person involved in a business) that serves as a manufacturer cannot serve or even have an interest in a retailer, and vice versa. The result of this is to prevent large breweries from opening their own retail stores which only sell their products. At the small business level, however, this can cause unique problems when it comes to ownership or ownership interests in a manufacturer or retailer. For example, if a client was looking to open a bar (a retailer), but also leases a commercial building to a microbrewery (a manufacturer), the State of Michigan would likely deny this client a liquor license for their new bar because of this “three-tier” conflict of interest.
There are some exceptions to this three-tier rule built into the Michigan Liquor Code. Specific manufacturers such as microbreweries, micro-distilleries and small wineries are allowed to serve their own products to customers for on-site consumption at their brewing or distilling facilities. The rub here is that these business structures are subject to quota limits in terms of how much of their product they can produce under Michigan law.
In order to operate as a manufacturer or retailer in the state of Michigan, a business must obtain the necessary license(s) from the Michigan Liquor Control Commission (“MLCC”). Depending on the type of business, the requisite license may be subject to a quota. The quota system limits the number of licenses that are available in each municipality, which is population-dependent. Most licenses in Michigan are also freely transferable. However, it is often very difficult to obtain these licenses. If all licenses in a municipality (up to the quota) have already been issued by the MLCC, purchasing one from an existing business is typically very expensive. A business may also hold any number of these licenses. These licenses include:
- Class C license - Permits a business such as a bar to sell beer, wine and spirits (including liquor) for on-premise consumption. There is one Class C license available per every 1,500 people in a given municipality.
- “Resort 550” – A transferable license for hotel resorts allowing the sale of beer, wine and spirits (including liquor) for on-premise consumption. The name commonly used for this type of license stems from the initial issuance of 550 of these licenses by the MLCC.
- Specially Designated Distributor (SDD) license – Allows a business such a gas station or grocery to sell packaged spirits (including liquor) for off-premise consumption. There is one SDD license available per every 3,000 people in a given municipality.
- Specially Designated Merchant (SDM) license – This is similar to an SDD license, but allows the business to sell beer or wine. SDM licenses are not subject to quota, and can be applied for by filling out an application with the MLCC. An SDM license is often held in conjunction with an SDD license, if the business can acquire one.
- There are also separate licenses for manufacturers, including breweries, microbreweries, small winemakers and small distilleries.
Action Step: Applying for a License
Whether the license is obtained from the MLCC directly or purchased from an existing business, the prospective license holder must file an application with the MLCC. Since this application could make or break your prospective business venture, it is very important to consult with a business attorney or a liquor law specialist before beginning to expend time and money in a business venture that will require a liquor license of any type. It is all too common for an entrepreneur to spend significant money and time to secure all the other facets of the business and then be denied a liquor license. Depending on the type of business and the license sought, there are many unique concerns that a business owner may face. Having an attorney with knowledge and experience in this area is very important. It can mean the difference between acceptance or denial of your application.