As the project development team continues to assess the prospects for developing an ethanol production facility they should consider the type of business entity that is most practical. The team should consider a range of options and factors that include:
- Debt and equity sources. Some business structures may be qualified for targeted financing programs geared specifically toward cooperatives, for example. The target market for equities placement may also be a factor in determining the business structure. For example, state and federal securities laws generally dictate investment thresholds, securities licensing requirements for single and multiple state sales activities and other factors relevant to the business structure.
- Tax laws and tax incentives. Several tax provisions are based on the specific make-up of the owners of a business entity. For example, the small producers investment tax credit for which many smaller ethanol plants qualify may not be beneficial to an entity structured as a cooperative.
- Grant eligibility. Provisions of the current Farm Bill include grant programs specifically targeted to business entities comprised of at least 51 percent farmer owners.
As the project development team considers formation of the business entity, the group should evaluate these and other factors that may affect development of the project, eligibility for financing through various sources, or tax eligibility implications. The project development team may wish to engage financial advisers and legal counsel to assist in evaluating the most beneficial business entity for the specific venture. The planning committee may wish to consider forming an originating board of directors that is capable of designing and defining a comprehensive plan for forming the business entity. With assistance from legal counsel, the project development team or originating board of directors should also consider and understand the requirements of applicable governance concepts and legal documents including:
- Articles of Incorporation
- By-laws of the organization
- Disclosure statements
- Advantages of various organizational structures
- Responsibilities of the Board and management team
- Confidentiality issues
- Actions that constitute insider trading or conflicts of interest
- Concepts of fiduciary responsibility
As the project development team or organizing board considers the needs of the venture and evaluates business entity options with the aid of legal and financial counsel, the group should determine the best form of governance for the specific project. Regional differences may have an impact on this decision.
Excerpts from: A Guide for Evaluating the Requirements of Ethanol Plants Developed by: The Clean Fuels Development Coalition and The Nebraska Ethanol Board in Cooperation with The U.S. Department of Agriculture.