The Sanity of Math and the numbers to survival

[chiguire]

Really insightful stuff.
I was thinking about this stuff last night, and even though the low income number is a bit discouraging to see, it is extremely positive too.

If all of your cases are sold to willing customers, I say your first year was a HUGE success. Why do I say that? I know many people who have gone into business for themselves, and did not turn a profit for the first few years. I don't know how they keep their hope up when the first profit they turn is $300 dollars for the year.

I look forward to your future updates, and good luck.

 

[wayneb]

Q:LLC and income tax.
A:You only get taxed on money you take 'out' of the business as income. If you never take money out, you are only charged alcoholic excise tax (minimal charge of 30 cents a gallon) when you sell your wine. However, why run a business that doesn't bring in any money to your pocket. You can expense a lot of stuff, but expense to much, and it's called tax evasion. Remember those mobsters in the 30's you get the idea.

Q: Is it still fun after going commercial.
A: It is not as fun, it is more draining on me and my family, but it is exhilarating to think that i made a wine people will want to buy and drink. I think it is just in my blood to run my own show. That is what keeps me going, not the 'fun' anymore.

Q: Is the tax liability eliminated if you re-invest all the profits.
A: Yes it is, except the excise taxes, but trust me, you will want some of the mula. No one works for a year and a half or two years and doesn't want the $ coming out of the venture.

Ian, I applaud you for pursuing this endeavor, and as someone who has been involved in two different startup ventures (one as my own LLC, another as a founder of an incorporated entity, and neither having to deal with all the added encumbrances that are inherent in the production and marketing of beverage alcohol) I can wholeheartedly agree that it takes far more than continued "fun" to keep going, as the fun factor rapidly wanes if you're really serious about getting the business established.

But I wanted to make a very important point about the tax liabilities of LLCs in the US, since something that you said in response to the other two questions that are quoted above leads me to believe that you may have been given some bum advice. If you own an LLC, then all the profits produced by that LLC during any tax period (for most people's arrangements it is the same as your personal income tax period - the calendar year) are taxable IN THAT YEAR, regardless of whether or not you remove the monies for "non-business" use (i.e. paying yourself a salary). Any money left over in your accounts at the end of that year, whether or not you intend for them to be re-invested in the business, are taxable according to IRS rules, and if you fail to report those funds (and they catch you), you will be seen by them as a tax evader. BE VERY CAREFUL, and read all the IRS pubs relating to LLC management and tax liability completely. I personally know that this is true (having paid a CPA/Tax expert for the advice, as well as having done my own homework), but the same thing is also explained in plain (non-government-ese) English on the NoLo website: http://www.nolo.com/legal-encyclopedia/article-29675.html

I don't want you, or anyone else starting up their own LLCs, to run afoul of those "revinooer agints."

BTW - If you want to keep the lion's share of the money earned by the LLC in the LLC coffers, then you can elect "corporate taxation." That can be a benefit since it will then make the first $75K taxable at the lower corporate rates, but then in addition to the corporate tax, ANY money that you take out for salary would be taxed again - as part of your personal income. There's no getting around the system -- too many accountants and lawyers have spent far too much time and money trying creative ways to skirt the system, and as a result, the tax code has rules covering 99.99% of the "creative" ways folks have tried to beat the tax man.

 

[tycoon]

Thank you Ian for your extremely interesting thread.

A few comments:

1) in the wine industry everywhere, an important principle is to relate costs to revenue along the "perceived quality" pyramid. E.g. if a wine (like an unoaked Sauvignon Blanc) is supposed to be drunk young and sold cheap, you use a plastic cork or a screw-cap to bottle it. Same with other production costs. All wineries produce different "qualities" and charge different prices. Note that real quality and price do not follow a linear association, especially for more expensive stuff. Having said this, I am not sure the (price/cost discrimination) principle is fully applicable to mead, as it is a niche product with a small market. But some things could be tried: using cheaper honey for cheaper meads, same with corks/caps, labels, etc. Another important point is the degree of market power you have, i.e. what is your capacity to charge higher prices. That depends on the competition conditions in the market you operate.

2) Your calculation of costs could be retouched a bit: Your equipment is a capital expenditure (one-off), and only its depreciation is a cost.

3) The closer to the final customer that you sell, the higher the profit margin. In the US, alcohol sales are more heavily regulated in some states than in others, but there may be some distributors that charge less than others or distributor cooperatives created by groups of producers that lower the take of the middle men. Just a thought.

4) It is often the case that bottling in smaller bottles generates larger profit margins (e.g. 330 ml or 500 ml bottles) than 750 ml bottles.

5) The opportunity cost of one's time is very important. For me, mead-making is a weekend hobby that I do a few times a month. If I did it for real, I would compare each hour of my time dedicated to that with the possible revenue from other commercial activities.

Just some ideas. Everybody, please feel free to comment on this....

Wassail!

 

[IanB]

Wayne

Wayne, thank you for your feedback. I would like to clarify that yes, any income at the end of the taxable year is considered 'taxed' and you can't invest it in the 'future' year. So yes, it is income. When I responded, I was thinking about having this cash in june, then re-investing it in june/july/august on new marketing materials, more cost of goods sold inventory, etc so that at the end of the year you have nothing in the bank, but a 'larger' business.

Also, the #1 thing I have learned about taxes (and trust me, I am a smart person and I am sure Wayne is too) is that you need to hire an accountant to do your taxes. Not give you business advice, but do your taxes.

I read everything in 2009 and still f'd it up and thankfully the accountant I hired later in 2009 cleared it all up, but I was at risk for 500$ a day being late filing paperwork on one thing. This paperwork mistake would have cost me 10k dollars on a 3000 dollar business. Luckily the IRS gave me a one-time forgiveness.

Take Waynes and my advice, hire a reputable, established accountant. Think green visor and carpet from the 60's (literally this is what my accountant has in there office) and feel safe he won't screw it up like you most certainly will.

 

[wayneb]

Also, the #1 thing I have learned about taxes (and trust me, I am a smart person and I am sure Wayne is too) is that you need to hire an accountant to do your taxes. Not give you business advice, but do your taxes.

Take Waynes and my advice, hire a reputable, established accountant. Think green visor and carpet from the 60's (literally this is what my accountant has in there office) and feel safe he won't screw it up like you most certainly will.

Oh, Yeah! AGREED without reservation. The US Tax Code is so immense, so intricate and so convoluted that even the experts mess up... I don't have enough time or interest to learn enough about it to know that what I'm putting on my return, when business income/expenses are involved, is anywhere near correct. And the IRS employs many, many examiners that hunt through returns (especially those from LLC owners, since that is where many of the "errors" are made) looking for just such screwups.

Life's too short for that kind of worry. Pay your accountant, and sleep better at night.

 

[Yraith]

Is it easier and safer to be a LLC or Sole Proprietor considering as of right now, it is just me doing all the work?

 

[wayneb]

That's a simple question with a very complex answer, so the best response is to say that it depends on your particular business situation. Starting up a sole proprietorship is easy and generally free, but when you are a sole proprietorship you are liable for everything associated with the business. Likewise, if the business tanks, YOU are personally held accountable, and things like a bankruptcy filing will show up on your personal credit report. You do get all the tax breaks of a business entity if you are a sole proprietorship, though.

An LLC shelters you, to some extent, from those kinds of personal finance repercussions. But generally you have to pay fees to get one going (they vary by state) and the limits of liability protection can also vary by state, so it behooves you to investigate your specific situation before you decide which way to go.

 

[IanB]

The default answer

The easy answer is just be an LLC. You fill out so many forms to become a winery, the llc form is a cake walk. It costs me 500$ a year in my state (maybe the highest in the union) but when we finally have wine to sell, we will be sheltered (to some extent) if/when we are sued.

IB

Now, lets get this topic back to finances...LLC vs sole proprietor is a whole other thread.

 

[Chevette Girl]

Life's too short for that kind of worry. Pay your accountant, and sleep better at night.

The same is true for any business, plus if there IS a mistake on your return, you want it to be your accountant's butt on the line, not yours. That's what tehy're paid for. Plus, a good accountant probably knows places to legally save money that you won't find on your own, I know my money was well-spent on the accountant when I took in tenants and declared their rent...

 

[Meadieval]

Thank you for sharing all of this with us Ian! I read your blog from beginning to end the other day and it was very inspirational. Not only your approach to mead making but your attitude along the way. Keep up the good work!

I'd like to think that years from now when my knowledge and skills have progressed, I would be fortunate enough to start up a small meadery, but doesn't everyone!

I was hoping you could touch more on the packaging. I have seen you mention that a few times but haven't seen much detail on the issue. What all does that entail and what are the costs directly associated with that.

Thanks again!

 

[akueck]

Would you mind disclosing what equipment you have? Are you making a few large batches or lots of small ones? How long do you budget for primary/secondary/storage prior to bottling? Does the government require microbiology assays? Alcohol analysis? How many different recipes do you use, and would you recommend sticking to a few basic recipes or having more varied ones?

 

[IanB]

Ok, a few answers

So, this thread is about financing, not equipment. If you want to start a new thread about that, feel free. All my recipes are in the members section, this is a community about sharing, and I wouldn't be anywhere without the help of this community, so I share them in my brewlog in the patrons section.

As to the cost of packaging, it is a bitch. Labels take SOO long to get designed, approved, and printed, you need them after you have made all the mead yet haven't sold a single bottle, so it's a big cash crunch. 1500$ is the cost, and the hours worked is in the hundreds (no lie)

As to the bottles, it's pretty much a 1$ a bottle. So you want to make 3000 bottles of wine, it will cost you 3000$ in bottles to actually put it into the bottle. + the labels (1500$) and corks and pvc/foil capsules (another 800$ or so for 3k bottles) = Total packaging is 5k dollars right at the end of making all your mead and paying your rent for 6+ months. It's hard to have that money sitting in your account for 6 months doing nothing.

I think that was the only financial question not answered. Let me know if people have other financial questions.

 

[Meadieval]

How do you move that many bottles though? Do you have your own cases made?

And could you talk a little more about the distribution side, it is something I have been very curious about, just haven't done or needed to do the research. From a financial standpoint, how does the agreement with distributors work? Do you sell them the mead and then they deliver it to their customers?

I know you touched on this a little in your OP but I was wondering if there were any other strings attached in the arrangement.

Thanks again!

 

[IanB]

Distribution is another topic

Distribution is another topic. Briefly though, I have no idea, since I am self distributing to retailers (allowed in my state for my specific license).

You may want to read "Brewing Up a Business" great book by dogfish head brewpub founder Sam Calagione great book for more general business questions and it does talk about the distributor relationships.

 

[YogiBearMead726]

I had two questions. Are you buying your bottles in bulk/at wholesale prices? I seem to find cases of bottles (12 per case) at my LHBS for around the $0.75/bottle price and I was wondering if there is some middle man that can be gone around to get a better deal?

Second, are the 5 gallon pails of honey the most practical? I've been using the national honey website (www.honey.com) to locate potential honey suppliers, and some of them list selling 55 gallon drums of honey. Since I don't have a use for buying that much, I've never inquired as to the price for one drum. Could this be a way to save some money?

I realize you've probably spent lots and lots of time dealing with all this research, just curious to see if you landed on the 5 gal for any particular reason.

Thanks for posting all this! Keep up the good work!

 

[IanB]

I feel this might be another question

We might just be talking back and forth to one-another at this point on this thread. I will let the moderators decide.

As to the 55 gallon question. We "Turn the fruit and honey of New England Honey into local wine". We couldn't get honey in 55 gallons from new england, only 5 gallon buckets, and it took 3 vendors before we found the right agreement.

Also, if you go 55 gallon, you need to think how you will 'move' that honey into the fermenter. A Honey pump costs about 650 used, or 1200+ new which will pump it out, or you can get a forklift and chain system to 'tip' the honey out. Either is lots of $ on something not required at start-up.

 

[YogiBearMead726]

Ah yes, producing with local ingredients is a very admirable goal. Makes sense that no local beekeepers produce that much

And I hadn't thought of moving the drum around/getting the honey out. I can see how this creates new financial issues not covered in basic start-up.

Thanks!

 

[Chevette Girl]

We might just be talking back and forth to one-another at this point on this thread. I will let the moderators decide.

This is all good information/discussion for anyone even considering getting into the business. Or any business for that matter. Please keep up the dialogue, some of us don't have as much to add but are reading this thread with interest...

 

[Chevette Girl]

And I hadn't thought of moving the drum around/getting the honey out. I can see how this creates new financial issues not covered in basic start-up.

OK I guess some of us lurking around this one might have something useful to say after all...

If the savings were worth it and the honey available, you could probably rig something that would work, industrial supply places have wheelie bases so you can move barrels around easily if a $250 drum-truck is too hard to use (I was able to move a full barrel with one when I was a wee thing of around 120 lbs myself) and you can also get tippers, last time I shopped through the Tenaquip catalog I don't remember them being prohibitively expensive, and if you had a lifter or even a ramp & platform of some kind to get it over top of your fermentor, there's probably even a way to do it hygenically... One of the trucks on the link there also acts as a tipper too so you could transfer and measure it out by the bucket...

 

[AToE]

Would you mind disclosing what equipment you have? Are you making a few large batches or lots of small ones? How long do you budget for primary/secondary/storage prior to bottling? How many different recipes do you use, and would you recommend sticking to a few basic recipes or having more varied ones?

These questions are actually all answered in his brewlog for his dry wine, it details his entire process and equipment, and how he starts with one recipe and then turns it into several.