BUSINESS OPERATION RECOMMENDATIONS
Paper details:
Prompt: Read the scenario’s then create a professional memorandum that provides recommendations for key operating decisions. For each recommendation, be sure to give a detailed explanation of the associated tax consequences.
Specifically, the following critical elements must be addressed: Create a memorandum to stakeholders with an executive summary using logical reasoning based on your tax research to explain why the client should adopt your recommendations made in the first meeting for structuring business operations.
Make a recommendation for the appropriate inventory cost flow assumption for a merchandising business. Make a recommendation for the appropriate overall business accounting method (cash, accrual, hybrid). Make a recommendation for the appropriate depreciation method and asset lives, including consideration of Section 179.
Make a recommendation for the appropriate fiscal year end for your recommended business entity. Explain the tax implications related to multijurisdictional operations of a business, including interstate and international considerations.
FULL PROJECT SCENERIO
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.
