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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
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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
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Presentation for Community Food Security Coalition / FoodBIN Conference
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
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Presentation for Community Food Security Coalition / FoodBIN Conference
Entity Structure Choices
• 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
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Presentation for Community Food Security Coalition / FoodBIN Conference
Entity Structure Choices
• Partnerships (General, Limited, Limited Liability)• Subchapter S Corporations• Limited Liability Companies (LLC’s)
Pass-through Entities
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Presentation for Community Food Security Coalition / FoodBIN Conference
Entity Structure Choices
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
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Presentation for Community Food Security Coalition / FoodBIN Conference
Entity Structure Choices
• 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
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Presentation for Community Food Security Coalition / FoodBIN Conference
Entity Structure Choices
• 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)
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Presentation for Community Food Security Coalition / FoodBIN Conference
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
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Presentation for Community Food Security Coalition / FoodBIN Conference
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
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Presentation for Community Food Security Coalition / FoodBIN Conference
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
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Presentation for Community Food Security Coalition / FoodBIN Conference
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
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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)
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Presentation for Community Food Security Coalition / FoodBIN Conference
The Financial Crisis: Impact on Small & Emerging Business
Venture Capital Also Impacted
48
7
05
101520253035404550
Thru 3 Qtrs 2007 Thru 3 Qtrs 2008
Initial Public Offerings
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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
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Presentation for Community Food Security Coalition / FoodBIN Conference
The Financial Crisis: Impact on Small & Emerging Business
Other Signs
15%
42%
43% "Prime""Average""Sub-Prime"
Shift in Peer-to-Peer Loan Profiles
55%40%
5%
Feb 08 Sept 08
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Presentation for Community Food Security Coalition / FoodBIN Conference
The Financial Crisis: Impact on Small & Emerging Business
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
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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”
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Presentation for Community Food Security Coalition / FoodBIN Conference
Surviving the Crisis
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
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Presentation for Community Food Security Coalition / FoodBIN Conference
Surviving the Crisis
Manage Cash-Flow• Tighten credit terms and
policies• Negotiate with customers• Negotiate with suppliers• Focus on collections;
Closely manage A/R
Lean & Mean
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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.
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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
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Presentation for Community Food Security Coalition / FoodBIN Conference
The Silver Lining?
A Bail-Out Plan
or…
“A Firewall for Main Street”
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Presentation for Community Food Security Coalition / FoodBIN Conference
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
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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
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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
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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]