Overview: For your final project, you will take on the role of a tax advisor and provide advice on business and investment strategies that will have positive tax implications for clients in the provided scenario and enable the clients to save money while accomplishing their business goals. Throughout the course, you will draft three memorandums providing critical strategy advice for three facets of decision making associated with business ownership: business formation decisions, business operation decisions, and business restructuring decisions.
For this first milestone, you will provide a recommendation on the appropriate form for the new business, called Tai-Ga. You will briefly describe the general tax advantages and disadvantages for each of the options available to the clients for forming the business entity. Then, you will provide the details of your recommendation, supporting your choice by applying your interpretation of tax laws and regulations to the clients’ business situation, goals, and expectations, and explaining the specific tax implications using calculations as appropriate.
Prompt:
Read the Milestone One scenario excerpt below—you can also access the full final project scenario—and then create a professional memorandum that recommends an appropriate business form for the owners of Tai-Ga.
Specifically, the following critical elements must be addressed:
– Create a memorandum for stakeholders with an executive summary using logical reasoning based on your tax research to explain why the client should choose your recommended business entity.
– Following the executive summary, provide a general discussion of the tax advantages and disadvantages for each of the entity options (C corp, S corp, partnership, LLC) available to Tai-Ga: Include a discussion of how each business form addresses owner concerns related to personal liability, return on investment, and tax costs related to compensation.
– Next, provide the details of your specific recommendation for a form of business as it relates to Tai-Ga by doing the following:
= Describe how your choice of business is best for addressing stakeholder concern.
= Provide a detailed explanation of tax implications associated with your recommendation in terms of tax benefits and costs. Include calculations.
= Include your interpretation of the tax law pertaining to the form of business entity you recommended and how the law helps Tai-Ga maximize tax outcomes. Reference appropriate tax code and regulations.
– Make a recommendation for the capital structure of the business, including:
o Value assigned to the organizers’ equity accounts versus debt payable to the organizers.
o Each of the organizers’ cost basis in Tai-Ga.
Scenario.
Carrie Carson: Carrie is a 60-year-old tai chi instructor living in Santa Fe, New Mexico. For many years, she practiced in Hollywood, and because of an acting background, she developed a clientele including many celebrities. About five years ago, when her husband died, she moved to Santa Fe to escape life in the fast lane, and many of her celebrity clients still see her on a regular basis. The celebrities rave about Carrie and her techniques and endorse her for free. At the encouragement of her celebrity friends, Carrie has developed a unique set of products that she would like to market, but she readily admits she has no marketing expertise.
David Duncan: Dave is a 50-year-old marketing expert. He started his marketing career in the home office of a major chain of brick-and-mortar stores 25 years ago; over the years, he expanded his role within that company to include management of internet marketing operations. He retired two years ago when that company was acquired, and he moved to Santa Fe with his children. As a result of the acquisition, Dave received a large severance package. He became a client of Carrie a year ago. They have become good friends and look forward to working together. Dave is divorced and has two dependent children, one in college in Boston and the other in high school in Santa Fe.
Naomi Nelson: Naomi is the 30-year-old manager of an auto parts warehouse in Santa Fe. She enjoys her job but has gone as far as she can with that company. Naomi is looking for an opportunity with a startup company and got to know Carrie through mutual friends. Naomi is single and has no children.
Andrew Anderson: Andy is a 65-year-old recently retired airline pilot. Andy has been a lifelong fan of yoga and tai chi and has been going to Carrie’s classes almost since the day Carrie moved to Santa Fe. Andy and his wife have always been prudent managers of their money, and they have a substantial net worth. Andy receives military and airline pension income, plus his wife is a successful veterinarian and continues to practice. Andy and his wife are interested in investing cash to help Carrie’s business expand rapidly, and Andy would like to work at least part time for the business. Andy and his wife have three grown children that are independent.
Carrie is presently operating as a proprietorship grossing $200,000 a year and netting $100,000 a year after expenses. She has designed her line of clothing and other wearable gear, plus DVDs and other products suitable for meditation, practicing tai chi, and similar activities. She has obtained copyright protection for her creative work to the extent allowed by law.
Carrie does not have any inventory at the present time but plans to acquire inventory and begin marketing and selling her products shortly after forming the new entity. Carrie does not plan to manufacture her products. She will contract that activity out to manufacturing companies recommended by her celebrity friends experienced in the marketing of their own personal lines. In addition, one of Carrie’s closest friend’s business managers has agreed to offer his services as a consultant to help Dave adapt his skill set to marketing Carrie’s line of products.
Dave has mapped out a business plan calling for modest sales and no or little profit in the first year, but once things catch on, he projects considerable growth and profit potential as follows:
Year Sales Net Income
1 $1 million None
2 $5 million $500,000
3 $15 million $2 million
4 $30 million $5 million
5 $50 million $10 million
Carrie, Dave, Naomi, and Andy all plan to become owners of the business in the following ownership percentages, but they are open to your suggestions:
Carrie, 50%
Dave, 20%
Naomi, 5%
Andy, 25%
Carrie will be contributing her designs, good will, and contacts willing to endorse her products for free.
Dave and Naomi will be contributing their hard work and expertise.
Andy will be contributing $500,000 to cover the cost of inventory and initial marketing and other operating expenses.
Because the products will be marketed to customers in connection with a physical activity, all four future owners are concerned about potential product and other liability and want to make sure the choice of business entity protects them from personal liability should an adverse event result from product use.
They plan to name the business Tai-Ga.
The Tai-Ga organizers (hereafter, “the Organizers”) want your professional advice regarding whether they should form a partnership, an S corporation, a C corporation, or some other type of business entity.
This project will consist of four memorandums produced prior to three meetings with the Organizers.
In the first meeting, you are tasked with preparing a memorandum to the Organizers recommending a type of business entity and how it should be capitalized. The form that you recommend for Tai-Ga will be based on the tax and liability concerns communicated to you by the Organizers. In your memorandum, you will address those concerns by discussing the tax and limited liability effects of the different entity options available to the Organizers, and you will recommend what you feel is their best choice based on that discussion. Assume that the organizers are concerned about minimizing their total tax impact (the sum of the personal and entity tax cost) but even more concerned about minimizing personal liability.
Rubric Guidelines for Submission: Your paper should be a 3- to 5-page Microsoft Word document (excluding the cover page and reference pages), with double spacing, 12-point Times New Roman font, one-inch margins, and at least three sources cited in APA format.
