Wiss Food Industry Group
Community Food Security Coalition /
FoodBIN Conference
October 7, 2008
by: James T. Duffy
Wiss & Company, LLP
354 Eisenhower Parkway
354 Eisenhower
Livingston,
NJ 07039 Parkway
Livingston, NJ 07039
973.994.9400
www.wiss.com
www.wiss.com
Livingston • Iselin • New York
Structuring for Growth
Choosing the right entity structure is dependent on many
factors
• Your vision regarding size/nature of your
business
• Profit/Loss projections
• Likelihood of a public offering
• The business’ vulnerability to lawsuits
• Tax objectives
• Number of investors
• Desired management structure
• Your need for access to cash out of the
business for yourself
Presentation for Community Food Security Coalition / FoodBIN Conference
Entity Structure Choices
Corporations
• Advantages
o Limited liability
o Ability to raise capital through sale of stock
o May be preferred by many sources of credit
• Disadvantages
o Set up is more expensive and time consuming
o Increased regulatory environment
o More formalities (issuing stock certificates, annual
meetings, keeping minutes of meetings, electing
directors, etc)
o Harder to get money out of a corporation
o Double taxation on distributions to shareholders
o Reasonable compensation standards may limit
deductible salaries
o No preferential tax rate for capital gains
Presentation for Community Food Security Coalition / FoodBIN Conference
Entity Structure Choices
Sole Proprietorship
•Advantages
o
o
o
o
Simple and inexpensive to form
Informal and flexible
Owned and controlled by a single person
Income reported directly on personal income
tax return (Schedule C)
•Major Disadvantages
o
o
o
o
Unlimited personal liability
May be at a disadvantage in raising capital
Harder time attracting high-caliber employees
Other vehicles such as single-member LLC
are much better in comparison
Presentation for Community Food Security Coalition / FoodBIN Conference
Entity Structure Choices
Pass-through Entities
• Partnerships (General, Limited, Limited Liability)
• Subchapter S Corporations
• Limited Liability Companies (LLC’s)
Presentation for Community Food Security Coalition / FoodBIN Conference
Entity Structure Choices
Partnerships
•Advantages
o Relatively easy to establish
o More than one owner helps ability to raise
capital
o Prospective employees attracted to business
if given opportunity to become a partner
•Disadvantages
o Partners are jointly and individually liable for
actions of other partners
o Profits shared
o Since decisions are shared, disagreements
can occur
Presentation for Community Food Security Coalition / FoodBIN Conference
Entity Structure Choices
Subchapter S Corporations
• Advantages
o Limited liability of a C-Corporation, but
avoid double tax on distributions
o Ability to raise capital through sale of stock
• Disadvantages
o Set up is more expensive and time
consuming
o Subject to “reasonable compensation”
standards
o Only one class of stock permitted
o Cannot specially allocate income
Presentation for Community Food Security Coalition / FoodBIN Conference
Entity Structure Choices
Limited Liability Corporation (LLC)
• Advantages
o
o
o
o
Hybrid business structure
Limited liability features of a corporation
Tax efficiencies of a partnership
Operational flexibility
• Disadvantages
o Set up could become somewhat complex
Presentation for Community Food Security Coalition / FoodBIN Conference
Form of Entity Comparison
Business
Characteristics
C-Corp
S-Corp
Limited
Partnership
LLC
YES
YES
Only for Limited
Partners
YES
Ownership
Restrictions
At least 1
shareholder
Maximum 100
shareholders;
Shareholders can
only be individuals,
certain trusts (no
corps, partnerships,
LLCs)
At least 1 general partner
and 1 limited partner; Any
individual or entity may be
a partner
At least 1 member; 2
members required
for partnership
treatment; Any
individual or entity
may be a member
Flexibility in
stock structure
Very Flexible
Generally Inflexible
Very Flexible
Very Flexible
Relatively
uncomplicated
Relatively
uncomplicated
Complex
Single Member –
Uncomplicated;
Multiple – More
complex
Board of
Directors
Board of Directors
By general partners
By all members
unless managers
appointed
Limited Liability
Formation
Management
Presentation for Community Food Security Coalition / FoodBIN Conference
Form of Entity Comparison
Tax Attributes
Limited
Partnership
C-Corp
S-Corp
Operations
Entity-level tax on
all income
Generally no entitylevel income tax; All
entity income/loss
flow through to
shareholders; No
special allocations
permitted
No entity-level tax
All entity income/loss
flows to the partners;
Special allocations
allowed subject to
certain rules
No entity-level tax
All entity
income/loss flows
to the members;
Special allocations
allowed subject to
certain rules
Operating
Distributions
Non-deductible
dividends –
causing double tax
Distributions
generally applied to
basis with no current
tax
Generally tax free
except to the extent that
cash distributed
exceeds basis
Generally tax free
except to the extent
that cash
distributed exceeds
basis
Liquidating
Distributions
Double tax –
corporate tax on
gain from sale +
shareholders
taxed on
liquidating
dividends
Single-level
shareholder tax on
gain; Possible
exception for built-ingains tax on
converted C-Corps
Generally tax-free
except to the extent that
cash distributed
exceeds basis
Generally tax-free
except to the extent
that cash
distributed exceeds
basis
Presentation for Community Food Security Coalition / FoodBIN Conference
LLC
The Choice Entity Choice
THE LLC
 Combines limited personal liability feature of a corporation with the tax
advantages of a partnership/proprietorship.
 Protects your personal assets from business creditors
 Protects your business assets from personal creditors
 Entrepreneur can retain control of business while enjoying tax benefits of a tax
flow-through entity
 No stock and not required to observe corporate formalities.
 Has become the entity of choice over limited partnerships and S-Corps due to:
•
LLC does not need a general partner
•
LLC does not the costly legal maintenance of an S-Corp
•
Easily change to other structures, particularly a C-Corp structure
Presentation for Community Food Security Coalition / FoodBIN Conference
The Financial Crisis: Impact on Small &
Emerging Business
Tightening Credit
“67% of small businesses reported being
“impacted” by credit crunch”
(Aug 2008 National Small Business Assn Survey)
“72% have responded by taking home
less money”
(Sept 2008 Small Business Watch Survey by Discover Fin Svcs)
“1/5th of small business owners have
loans leveraged by 2nd home mortgages”
Presentation for Community Food Security Coalition / FoodBIN Conference
The Financial Crisis: Impact on Small &
Emerging Business
Tightening Credit
Banks are not lending or lending at high costs
LIBOR rate is rising rapidly
Banks are afraid to lend to each other
- “TED SPREAD” at a record high- hit 3.95% on Monday
(was only 1.04% on September 5th)
Presentation for Community Food Security Coalition / FoodBIN Conference
The Financial Crisis: Impact on Small &
Emerging Business
Venture Capital Also Impacted
50
45
40
35
30
25
20
15
10
5
0
48
7
Thru 3 Qtrs 2007
Thru 3 Qtrs 2008
Initial Public Offerings
Presentation for Community Food Security Coalition / FoodBIN Conference
The Financial Crisis: Impact on Small &
Emerging Business
Venture Capital Also Impacted
In 3rd quarter 2008, IPO’s and M&A deals were
down 66% from the year-ago period
Headed towards lowest number of completed M&A
deals/IPOs in a decade
Presentation for Community Food Security Coalition / FoodBIN Conference
The Financial Crisis: Impact on Small &
Emerging Business
Other Signs
5%
15%
"Prime"
"Average"
"Sub-Prime"
43%
40%
55%
42%
Feb 08
Sept 08
Shift in Peer-to-Peer Loan Profiles
Presentation for Community Food Security Coalition / FoodBIN Conference
The Financial Crisis: Impact on Small &
Emerging Business
Other Signs
70%
70%
60%
50%
40%
30%
22%
20%
10%
0%
Mid-March 08
Sept 08
Percentage of Ibank.com postings viewed by
potential lenders
Presentation for Community Food Security Coalition / FoodBIN Conference
Surviving the Crisis
CASH IS KING!
“42% of small business owners say they
have temporary cash flow issues”
(August 2008 Discover Financial Services Survey)
“With tightening credit market, cash flow
becomes even more important”
Presentation for Community Food Security Coalition / FoodBIN Conference
Surviving the Crisis
Lean & Mean
Streamline Operations
•
•
•
•
Tighten up supply chain
Limit over-investment in inventory
Cut production costs
Examine every line item for nonessential spending
• Hold off on non-essential capital
expenditures
• Reevaluate pricing strategies;
Consider discounts
Presentation for Community Food Security Coalition / FoodBIN Conference
Surviving the Crisis
Lean & Mean
Manage Cash-Flow
• Tighten credit terms and
policies
• Negotiate with customers
• Negotiate with suppliers
• Focus on collections;
Closely manage A/R
Presentation for Community Food Security Coalition / FoodBIN Conference
Surviving the Crisis
Be Prepared for the Credit Crunch
Don’t assume that credit will be there.
Look and act like a legitimate business.
Communicate with credit sources; Keep in touch.
Check your credit report for inaccuracies.
Presentation for Community Food Security Coalition / FoodBIN Conference
Surviving the Crisis
Seek Alternative Credit Sources
Smaller commercial banks
Peer-to-peer lending
Factoring
Take advantage of credit terms with suppliers
Equipment leasing/leasebacks
Presentation for Community Food Security Coalition / FoodBIN Conference
The Silver Lining?
A Bail-Out Plan
or…
“A Firewall for Main Street”
Presentation for Community Food Security Coalition / FoodBIN Conference
The Silver Lining?
The Federal Rescue Plan
Some positives for small business:
Provision to help local community banks clear out $36
billion of worthless government sponsored assets
(Freddie Mac and Fannie Mae)
• Will lessen write-downs and provide more capital to lend
to individuals and small businesses
Increased FDIC insurance limits from $100k to $250k
• Provides confidence that small business banking assets
are secure
Presentation for Community Food Security Coalition / FoodBIN Conference
The Silver Lining?
The Federal Rescue Plan
Some positives for small business:
Alternative Minimum Tax patch
• Provides tax relief for small businesses and
owners
Extends R&D and Energy tax credits
• Will assist start-ups in the R&D phase
Presentation for Community Food Security Coalition / FoodBIN Conference
The Silver Lining?
Other Benefits
 Better deals out there for businesses
• Commercial real estate rental rates
• Advertising costs
• Vehicles
 Less competition
 Increased talent pool available for small
businesses
Presentation for Community Food Security Coalition / FoodBIN Conference
Wiss Food Industry Group
Contact Information
James T. Duffy, Partner-in-Charge
jduffy@wiss.com
Mike Lee, Partner
mlee@wiss.com
Matthew Barbieri, Manager
mbarbieri@wiss.com
354 Eisenhower Parkway
Livingston, NJ 07039
973.994.9400
www.wiss.com