You operate your own small accounting firm and have just finished a meeting with a new...

    

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You operate your own small accounting firm and have just finished a meeting with a new client, who also happens to be your long-time friend, Jasmine Potter. Jasmine graduated from University with a Dietetics major and worked as a Dietician after graduating. When her daughter was born five years ago, she decided to reduce her hours to part-time. Jasmine was always known for her outstanding baking and she explained that having more time at home allowed her to find the joy in baking again. Specifically, she started exploring how to make good quality baked goods that addressed special dietary considerations such as vegan and gluten-free diets. She has a steady demand for her products from family and friends. Her brother-in-law, Michael, recently adopted a vegan diet and after tasting Jasmine's baking, suggested that she start her own bakery. After thinking about it for some time, Jasmine has decided to go for it and has come to you for taxation advice related to her new business venture. During your meeting, you gather the following information about Jasmine and her proposed business: Jasmine is married to Eric, a lawyer, who works at Potter & Sons LLP, a law firm where his brother, Michael, and his parents are all lawyers. Eric earns approximately $225,000 per year in employment income from the law firm. Jasmine and Eric have one child, a five-year old daughter named Sophie. Michael has promised a $1,000,000 loan to help Jasmine start her business. As a condition of the loan, Michael would like some say in the operation of the bakery. Jasmine is happy to have Michael's assistance as he has experience in drafting contracts and other legal agreements for small businesses. Jasmine has prepared a budget and estimates the business may have small losses for the first year but is confident it will become profitable in the second year. Required: Prepare a memo to Jasmine recommending the best organizational structure for her new business. For each type of organizational structure (proprietorship, partnership, corporation) include tax related advantages and disadvantages as well as other (legal, financial, etc.) advantages and disadvantages related to Jasmine's personal situation (described above). Provide a conclusion on which alternative is best for Jasmine and why. Your memo should not exceed 750 words. Part II Five years have passed since your initial meeting with Jasmine. She decided to operate her bakery business as a corporation, called Sweet Treats Inc. The business has been more successful than Jasmine could have ever imagined. The following information is available for Sweet Treats Inc.: Profits have been steadily increasing. In the most recent tax year, the company reported approximately $250,000 of taxable income (consisting solely of active business income). The corporation claims the small business deduction every year on its corporate tax return. а. b. Jasmine owns 60% of the Class A voting common shares. Michael Potter (Jasmine's brother-in-law) owns 30% and Eric, her spouse, owns the remaining 10%. Michael provided the company with $500,000 in the form of a loan with a nominal interest rate of 1%. The С. company pays Michael the interest each year. d. The company has four employees that assist Jasmine with the baking and store front. Eric and Michael assist with the bookkeeping and legal and administrative operations for the bakery. For the last three years, Jasmine has withdrawn a salary of $50,000. To date, neither Eric nor Michael have е. withdrawn amounts from the company (other than the interest Michael receives). However, Eric has dedicated more time to the bakery and has cut back on his legal work. Now that the company is in a stable, profitable position, Michael would like to receive returns on his investment. f. Jasmine has been receiving requests from grocery stores to supply them with pre-packaged product, however, due to the limited size of the current facility, Jasmine does not have capacity to do this. As such, Jasmine and Michael are considering purchasing a larger building for the bakery. Currently, Sweet Treats Inc. operates out of a leased building that includes a small commercial kitchen and store front. For legal liability purposes, Michael thinks the building should be purchased by a separate corporation, jointly owned by Michael and Jasmine. Jasmine has prepared a budget and estimates that income after this expansion will grow to $600,000 within two years. company full-time, if the expansion proves successful. She and Eric have discussed the possibility of Eric working for the Based on the above information, prepare a memo for Jasmine answering the following questions: i. Sweet Treats Inc. earns a significant amount of active business income each year with expectations that it will increase substantially in the next few years. Provide Jasmine with some tax planning advice with regard to the active business income earned by Sweet Treats Inc. each year. Be sure to include tax planning advice related to Jasmine and Michael's idea to purchase a new building for the business in a separate corporation and how this might impact active business income and claiming the small business deduction for Sweet Treats Inc. Currently, Jasmine receives a salary from the corporation and Michael and Eric receive no remuneration from the corporation. Provide Jasmine, Eric and Michael with an analysis of the general considerations, advantages and disadvantages of salary versus dividend remuneration and provide a ii. recommendation to them taking their situations into account. This memo should be no more than 750 words. You operate your own small accounting firm and have just finished a meeting with a new client, who also happens to be your long-time friend, Jasmine Potter. Jasmine graduated from University with a Dietetics major and worked as a Dietician after graduating. When her daughter was born five years ago, she decided to reduce her hours to part-time. Jasmine was always known for her outstanding baking and she explained that having more time at home allowed her to find the joy in baking again. Specifically, she started exploring how to make good quality baked goods that addressed special dietary considerations such as vegan and gluten-free diets. She has a steady demand for her products from family and friends. Her brother-in-law, Michael, recently adopted a vegan diet and after tasting Jasmine's baking, suggested that she start her own bakery. After thinking about it for some time, Jasmine has decided to go for it and has come to you for taxation advice related to her new business venture. During your meeting, you gather the following information about Jasmine and her proposed business: Jasmine is married to Eric, a lawyer, who works at Potter & Sons LLP, a law firm where his brother, Michael, and his parents are all lawyers. Eric earns approximately $225,000 per year in employment income from the law firm. Jasmine and Eric have one child, a five-year old daughter named Sophie. Michael has promised a $1,000,000 loan to help Jasmine start her business. As a condition of the loan, Michael would like some say in the operation of the bakery. Jasmine is happy to have Michael's assistance as he has experience in drafting contracts and other legal agreements for small businesses. Jasmine has prepared a budget and estimates the business may have small losses for the first year but is confident it will become profitable in the second year. Required: Prepare a memo to Jasmine recommending the best organizational structure for her new business. For each type of organizational structure (proprietorship, partnership, corporation) include tax related advantages and disadvantages as well as other (legal, financial, etc.) advantages and disadvantages related to Jasmine's personal situation (described above). Provide a conclusion on which alternative is best for Jasmine and why. Your memo should not exceed 750 words. Part II Five years have passed since your initial meeting with Jasmine. She decided to operate her bakery business as a corporation, called Sweet Treats Inc. The business has been more successful than Jasmine could have ever imagined. The following information is available for Sweet Treats Inc.: Profits have been steadily increasing. In the most recent tax year, the company reported approximately $250,000 of taxable income (consisting solely of active business income). The corporation claims the small business deduction every year on its corporate tax return. а. b. Jasmine owns 60% of the Class A voting common shares. Michael Potter (Jasmine's brother-in-law) owns 30% and Eric, her spouse, owns the remaining 10%. Michael provided the company with $500,000 in the form of a loan with a nominal interest rate of 1%. The С. company pays Michael the interest each year. d. The company has four employees that assist Jasmine with the baking and store front. Eric and Michael assist with the bookkeeping and legal and administrative operations for the bakery. For the last three years, Jasmine has withdrawn a salary of $50,000. To date, neither Eric nor Michael have е. withdrawn amounts from the company (other than the interest Michael receives). However, Eric has dedicated more time to the bakery and has cut back on his legal work. Now that the company is in a stable, profitable position, Michael would like to receive returns on his investment. f. Jasmine has been receiving requests from grocery stores to supply them with pre-packaged product, however, due to the limited size of the current facility, Jasmine does not have capacity to do this. As such, Jasmine and Michael are considering purchasing a larger building for the bakery. Currently, Sweet Treats Inc. operates out of a leased building that includes a small commercial kitchen and store front. For legal liability purposes, Michael thinks the building should be purchased by a separate corporation, jointly owned by Michael and Jasmine. Jasmine has prepared a budget and estimates that income after this expansion will grow to $600,000 within two years. company full-time, if the expansion proves successful. She and Eric have discussed the possibility of Eric working for the Based on the above information, prepare a memo for Jasmine answering the following questions: i. Sweet Treats Inc. earns a significant amount of active business income each year with expectations that it will increase substantially in the next few years. Provide Jasmine with some tax planning advice with regard to the active business income earned by Sweet Treats Inc. each year. Be sure to include tax planning advice related to Jasmine and Michael's idea to purchase a new building for the business in a separate corporation and how this might impact active business income and claiming the small business deduction for Sweet Treats Inc. Currently, Jasmine receives a salary from the corporation and Michael and Eric receive no remuneration from the corporation. Provide Jasmine, Eric and Michael with an analysis of the general considerations, advantages and disadvantages of salary versus dividend remuneration and provide a ii. recommendation to them taking their situations into account. This memo should be no more than 750 words.

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To Jasmine From The tax partner Date Subject The best organizational structure for the business I have evaluated proprietorship and corporation organi... View the full answer