Chris Martin

J'ESP, Whose annual reports, and how does one access this info??? Thanks!

Congrats! "Slainte!"

Coop, If you can get your hands on it , you can find an interesting Japanese study on this in Chapters 15 & 16 of the 2008 Worldwide Distilled Spirits Conference book titled Production, Technology and Innovation. In a nutshell, use of brewer's yeast with distiller's yeast yielded a more "complicated" spirit, but unfortunately at the expense of "estery" qualities. Of the brewer's yeasts tested, the most distinctive spirit was found specifically with dry ale yeast (supplied by Lallemand and Fermentis). The reason for the lack of esters with the dry ale yeast was explained this way: So, it was suggested that the estery quality could be improved by the following at the growth phase: And, at the death phase... Also, some interesting info in Chapter 14 of the 2004 edition, Tradition and Innovation.

JohnD & Todd, what in particular should I watch out for re: maintaining consistency? Thanks!

Very true. Always a good idea to check with an accountant first. For example, while all 50 states allow the formation of LLC's (specifically, single member LLC's, which is how you may need to start-up), there are differences. Of course, you can set-up your LLC in a state other than your own. FYI, all states allow the formation of C-Corp and S-Corp, and the standard rules apply. Generally speaking, Delaware has the most legal "precedent" behind the corporation structure, which is the reason why it is a rather common choice for formation of venture capital-funded entities. You will also find other serious limitations on who or what types of entities can hold stock/member interests in a corporation or LLC formed in a particular state, or even at the Federal level. For example, S-Corps cannot have foreigners or self-directed IRA's as stockholders (among other limitations). The IRS 1244 corporate stock election is something you can do that applies on the Federal level, regardless of the State. This means that the investor can write off his/her loss on the Federal tax return, but not on his/her State taxes. So, yeah, always listen to the Robot and you won't get Lost In Space.

@ Scott: Thank you for all your contributions. Believe me, I wish I could *give* as good as I *get* from this forum! @ Todd: Well, regardless of the business structure you choose, there are lots of ways to doll-up your deal. As a start-up, mostly it will involve mitigating risk for investors. Speaking with an accountant is a good start, but don't forget who you're speaking with... in my experience, most accountants are NOT deal-makers and they're a pretty risk-averse lot. But they can help advise you on some of the tax incentive options you can put into the deal for investors. Ultimatly a lawyer may need to get involved to draft your agreements with investors. Scott makes a good point that if an investor gets a wild hair at some point, it will be *their* lawyer who will try to pick apart your deal. At the end of the day, much of it depends on how savvy and wealthy your investor is, and what turns them on. Not to give you legal advice here, but generally you have less to worry about with an investor who is wealthy enough to afford the total loss of their investment ("accredited investors") and one who has invested in private equity deals in the past, since it is assumed they are fully capable of evaluating the merits of your deal on their own. Another incentive example -- if you go with a C- or S-Corp structure (NOT an LLC) and you're raising $1 million or less, you could sweeten the deal by offering IRS Section 1244 stock to the investor(s). Basically, you declare your stock to be offered to investors as 1244 stock in your corporate minutes, and reflected as such on stock certificates (if any). Typically, if an investor buys stock in a company but the company folds at some point, that's that... they've lost their money and there is nothing more they can get out of it. Or, if they sell their stock at some point for a loss, they just have to eat the loss. But if that stock is 1244 stock, they can declare up to $50,000 of it (or, if the investment is a joint investment, $100,000) as a *loss*, which means they can write it off on their taxes. It's like "tax insurance" for the investor. There are lots of possibilities... you might just consider offering a deal as a starting point to investors and then expect to negotiate from there.

Mike, I too am really interested in learning more (from you and from anyone with experience!). Is there any way you could share some of your experiences here on the forum for those start-ups like me, or, at the very least, may I call you too? -Chris

Actually, this is incorrect regarding LLC ownership in relation to the DSP application. Here is the response I received from the TTB: A "member" (owner) of an LLC may be either "active" or "passive". "Active" members are owners who are involved in the day-tto-day running of the venture. It is these who would generally be classified as "managing members" and thus would need to be included on the DSP application. Otherwise, investors would generally be classified as "passive" non-managing members and would only need to be included if their unit share of the venture meets or exceeds 10%. An LLC has many advantages over the Corporation, but if you needed to, it is easy to switch from LLC to Corporation. It is NOT easy to switch from Corporation to LLC unless you're willing to accept some serious pain from the IRS. It may be easier for you to raise startup money as an LLC because you can grant different rights to each member (owner). For example, one thing you could do as an incentive to invest is to grant the investors a 30% share of the venture's profits, losses and liabilities, but a 70% share of the venture's assets. That way, they could have the added advantage of greater equipment depreciation write-offs, while also holding a greater claim to the assets should you ever close your doors and need to sell everything off (thus reducing their investment risk). This would also reduce the amount of immediate dilution to the value of their investment they would have to accept, since they would have a greater share of the book value of the company. Then, once you have returned their investment amount out of the future profits, you could agree with investors that their share of the assets is reduced back to 30% -- in line with their share of the profits, losses and liabilities. Just a thought. I think you could only do some of this with a C-Corporation, and it would involve issuing different classes of Preferred shares, dealing with conversion rights, anti-dilution provisions, liquidation preferences, etc. Ugh. Of course, you would have to deal with being double-taxed (corporation gets taxed, and then owners get taxed individually on their dividends). While an S-Corporation doesn't get double-taxed (profits "pass-through" to the owners), you can't issue more than one class of shares, so you couldn't do any of this neatly.

It's not entirely unrepeatable... they'll just need to source oak of a specific grain and then set a specific char level. Expensive and resource dependent, yes. I think the biggest challenge will be to ellicit consistent feedback/reviews from customers over the course of several years, and in a sufficient quantity to make for a statistically significant profile-build of each barrel. Obviously four or five customer "reviews" of bottles from a particular barrel isn't going to give much insight into its characteristics and whether those characteristics appeal in a broader sense to the market. But it sure is a neat experiment. I hope to try a bottle or two.

That's great!

Good letter, but, if this is also intended to rally support of non-distilling constituents (for a Facebook page... not just as a letter to Representatives), maybe add more of a focus on what this means to the consumer, rather than to the craft distiller. Make the consumer care. Maybe an appeal to a sense of fairness... "It's not fair! Why should small breweries and wineries be given special tax breaks, while the same benefit is not also extended to small distilleries?" Maybe an appeal to good ole' American capitalism... "Small wineries and craft breweries have flourished as a result of tax breaks like this. Because of this, consumers have far greater choice of fine wines and beers they can buy! So why should consumers' choice be limited to spirits from multi-national corporate conglomerates? Your support of this bill will help craft distilleries bring their fine products to market for you to enjoy -- world-class spirits that are hand-crafted in the USA by American labor! Support for your local distilleries means local jobs and award-winning products you can feel proud of. Tax breaks for small business means greater competition, and that's always a good thing for consumers. Isn't that what capitalism is all about?" Solicit action... "The bill has now been introduced before congress. That's motion in the right direction! But too often Washington D.C. confuses 'motion' for 'action'. We need YOU to demand ACTION from congress. [From the original letter...] If you are interested in joining in this effort to provide needed tax relief to these new American enterprises or if you would like additional background information, please contact Kristin Cook at Congressman Hinchey's Office." Just my 2-cents... I'm just thinking, "Why should a consumer care enough to support tax breaks to craft distilleries, particularly in this time when they're looking at federal, state and local government spending cuts across the board in their own backyard?" I don't want to sound like a wet blanket. The first step has successfully been taken. Excellent! Now we need to shift the focus towards rallying public support, right?

Can someone inform whether the above ^^ can be done in the USA without a distilling license? Creating an "add-in essence" seems to be a good idea from a product standpoint...

Oh, how I would love to hear about more "tactics" to anticipate once we get up & running... anyone want to share more war stories? Pleeeeeze? "Stay thirsty, my friends."

That is a fascinating chart, OMM. Interesting to see the impact of the tobacco lobby in states like Alabama, N. Carolina and Virginia in particular -- while these states have a very low tobacco tax, they're among the very highest in spirits tax! Ouch!

I don't see any reason why you can't use 174 for product development or for what you spend "tweaking" a product recipe. Basically, anything where there is not "certainty" as to the outcome... You may have already read this, but here's the IRS's take on it: http://www.irs.gov/businesses/article/0,,id=156366,00.html

Sending get-well-soon thoughts & prayers... Ralph, you're an inspiration to us all. I have such respect for your efforts to change the laws. We all need you to GET WELL SOON!!!

Well, if that is the author's version of a business plan, then I agree -- don't bother. Otherwise, my business partner and I have, over the years, written real business plans that have raised MANY times more money than Dell or Jobs etc. started with. Yes, the Executive Summary is the killer elevator pitch. But those cash flow projections need to be backed up with realistic assumptions. That IS something that serious investors' financial advisors/attorneys/accountants do indeed look at. And there needs to be plenty of explanation/reasoning backing those assumptions. Every sophisticated investor knows you're not going to follow the business plan to a "t", but for most businesses (like the spirits business), it is your opportunity to differentiate yourself by identifying your prospective competitors and showing where your business belongs in the mix. If you can't do that, then you probably shouldn't be in business.

What precisely do you mean? With all due respect, this need not be a scavenger hunt. Do tell...

Ahh yes, I can see how that could make a noticable difference! Does anyone know of any credible research done on, say, 15 gal. vs. 53 gal. charred? Gosh... the whole topic of barrel aging seems to have so many myths associated with it... like heat and/or humidity having a particular effect, etc. On that subject Bill Owens' Craft Of Whiskey Distilling states that low humidity aging makes for better vanillin extraction, and that higher temperatures accelerate oxidation which contributes to increase of acids and esters. But I've also spoken with people who say this is all a myth too. Sorry, I don't mean to hijack the thread with that stuff. But I do want to know if anyone has any reasonably concrete data on this.

Thank you for that reference, Phil. A Google search directed me to the PDF itself, for those who may be interested: http://www.scientificsocieties.org/JIB/papers/1995/1995_101_5_359.pdf

Here's my (adapted) sample letter so far... I'm stealing Ralph's great bullet points... I'd love to hear what some of you might add to this to spice it up. ----------- September 19, 2010 Representative (XX) (Address) Washington, D.C. 20515 Dear Rep. (XX), As you are aware, H.R. 4278, a bipartisan bill introduced by Representatives Neal and Brady, is under consideration to create a graduated beer excise tax rate of $3.50 and $16 for America's small brewers. I urge your co-sponsorship of the resolution. Moreover, please allow me to point out the opportunity this presents to extend similar support to the burgeoning Craft Distiller industry, which currently enjoys none of the excise tax benefits afforded microbreweries and small winemakers. The small brewers excise tax rate enacted by Congress in 1976 helped to nurture the development and growth of the craft beer industry in America by establishing a reduced, graduated excise tax rate for microbrewers. To that end it has been a huge success. Now more than 100,000 jobs are created by microbreweries, $3 billion paid in wages and benefits, and $2.3 billion in tax revenue is generated. And with the growth of microbreweries across the nation, the impact on tourism, agriculture and trade has been extremely positive. However, while these benefits were extended to microbrewers (and similar benefits to small wineries), small distilleries have enjoyed no such benefits. Now, with H.R. 4278 proposing to further reduce excise tax rates for microbrewers, small distillers still remain completely outside the context of the proposed legislation. Like with the craft beer industry of two decades ago, today there is an unprecedented growth of craft distilleries. Where there were just a handful of small distilleries only a decade ago, now they number over 300, and growing at a rate of 10% or more per year! What was once a proud, distinctively American craft industry -- lost during the Prohibition era -- is experiencing an astounding resurgence. Despite the steep barriers to entry (equipment is very expensive and the hurdles involved in obtaining local, state and federal permits are prohibitive), these small businesses are having a significant positive impact on: • Economic development in rural and agricultural regions, or in neglected urban areas; • Job creation; • Support for small and medium agricultural producers; • Tourism opportunities; • Re-establishment of a traditional American Craft industry whose products are now recognized amongst the world’s finest; • ...and, of course, generating local, State and Federal tax revenues. According to an economic study conducted by John Friedman of Harvard University on behalf of the Brewers Association, H.R. 4278 would stimulate job creation quickly and at a low cost to the federal government. Extending these excise tax reductions to craft distilleries would not only expand the job-creation benefits the resolution is expected to produce, but would ensure enormous future benefits by fostering the rapid growth of America’s craft distilling industry. Breweries and distilleries have much in common. With the exception just one step in the production process -- the distillation process itself – there is little difference between the two. A distiller must first create a “beer” from which a whiskey (for example) is distilled. Given this simple fact, why should there not be parity between small craft distillers and microbreweries (or small wineries) when it comes to excise tax reductions? Again, please consider co-sponsoring H.R. 4278, and please propose the inclusion of the growing craft distilling industry in the legislation. If you have any questions, please contact me at XXXX. Thank you for your time and consideration. Sincerely, Chris Martin

Yes, this is going on NOW with a consideration to reduce the excise tax for small brewers by half in a graduated tax scale. I would think it would be a good opportunity to introduce language to the effect that equivalent tax reductions be afforded small distillers. House Resolution 4278 Senate Bill 3339 Here's a link to the Brewers Association site with model letters to Senators and Representatives, which could be (somewhat) adapted to be applicable for distillers. EDIT: I see these were mentioned further back in the thread.

Ahhh... just as I posted, seems Chuck beat me to it. B.I.G. publishes Cheers and Beverage Dynamics, as well as research (2010 Liquor Handbook, expensive reports per category [i.e. Gin, Vodka, North American Whiskey...], etc.).

Another one: Beverage Information Group. The info will cost more than the reportlinker data...

Well, at least the low carb dieters will like "zero carbohydrates."