wiss & company, llp 354 eisenhower parkway livingston, nj 07039 livingston • iselin • new...

354 Eisenhower Parkway Livingston, NJ 07039973.994.9400www.wiss.com

Wiss Food Industry GroupCommunity Food Security Coalition /

FoodBIN ConferenceOctober 7, 2008by: James T. Duffy

Wiss & Company, LLP

354 Eisenhower ParkwayLivingston, NJ 07039

Livingston • Iselin • New York

www.wiss.com

Presentation for Community Food Security Coalition / FoodBIN Conference

Structuring for Growth

• 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

Choosing the right entity structure is dependent on many factors


Entity Structure Choices

• Advantages

o Limited liability o Ability to raise capital through sale of stocko May be preferred by many sources of credit

• Disadvantageso Set up is more expensive and time consumingo Increased regulatory environmento More formalities (issuing stock certificates, annual

meetings, keeping minutes of meetings, electing directors, etc)

o Harder to get money out of a corporationo Double taxation on distributions to shareholderso Reasonable compensation standards may limit

deductible salarieso No preferential tax rate for capital gains

Corporations



• Advantageso Simple and inexpensive to formo Informal and flexibleo Owned and controlled by a single persono Income reported directly on personal income

tax return (Schedule C)

• Major Disadvantageso Unlimited personal liabilityo May be at a disadvantage in raising capitalo Harder time attracting high-caliber employeeso Other vehicles such as single-member LLC

are much better in comparison

Sole Proprietorship



• Partnerships (General, Limited, Limited Liability)• Subchapter S Corporations• Limited Liability Companies (LLC’s)

Pass-through Entities



Partnerships• Advantages

o Relatively easy to establisho More than one owner helps ability to raise

capitalo Prospective employees attracted to business

if given opportunity to become a partner

• Disadvantageso Partners are jointly and individually liable for

actions of other partnerso Profits sharedo Since decisions are shared, disagreements

can occur



• Advantageso Limited liability of a C-Corporation, but

avoid double tax on distributionso Ability to raise capital through sale of stock

• Disadvantageso Set up is more expensive and time

consumingo Subject to “reasonable compensation”

standardso Only one class of stock permittedo Cannot specially allocate income

Subchapter S Corporations



• Advantageso Hybrid business structureo Limited liability features of a corporationo Tax efficiencies of a partnershipo Operational flexibility

• Disadvantageso Set up could become somewhat complex

Limited Liability Corporation (LLC)


Form of Entity Comparison

Business Characteristics

C-Corp S-Corp Limited

Partnership

LLC

Limited Liability 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

Formation Relatively uncomplicated

Relatively uncomplicated

Complex Single Member – Uncomplicated; Multiple – More

complex

Management Board of Directors

Board of Directors By general partners By all members unless managers

appointed


Form of Entity Comparison

Tax Attributes C-Corp S-Corp

Limited Partnership LLC

Operations Entity-level tax on all income

Generally no entity-level 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-in-

gains 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


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


The Financial Crisis: Impact on Small & Emerging Business

“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”

Tightening Credit



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)



Venture Capital Also Impacted

48

7

05

101520253035404550

Thru 3 Qtrs 2007 Thru 3 Qtrs 2008

Initial Public Offerings



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



Other Signs

15%

42%

43% "Prime""Average""Sub-Prime"

Shift in Peer-to-Peer Loan Profiles

55%40%

5%

Feb 08 Sept 08



Other Signs70%

22%

0%

10%

20%

30%

40%

50%

60%

70%

Mid-March 08 Sept 08

Percentage of Ibank.com postings viewed by potential lenders


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”



Streamline Operations

• Tighten up supply chain• Limit over-investment in inventory• Cut production costs• Examine every line item for non-

essential spending• Hold off on non-essential capital

expenditures• Reevaluate pricing strategies;

Consider discounts

Lean & Mean



Manage Cash-Flow• Tighten credit terms and

policies• Negotiate with customers• Negotiate with suppliers• Focus on collections;

Closely manage A/R

Lean & Mean



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.



Seek Alternative Credit Sources

Smaller commercial banks

Peer-to-peer lending

Factoring

Take advantage of credit terms with suppliers

Equipment leasing/leasebacks


The Silver Lining?

A Bail-Out Plan

or…

“A Firewall for Main Street”


The Silver Lining?

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

The Federal Rescue Plan


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


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

354 Eisenhower Parkway Livingston, NJ 07039973.994.9400www.wiss.com

Wiss Food Industry GroupContact Information

James T. Duffy, [email protected]

Mike Lee, [email protected]

Matthew Barbieri, [email protected]

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