Pretend that you are the owner of your own accounting firm. Your firm specializes in the start-up market. You advise clients on how to set up a new business including hiring and payroll. Since many of your clients are start-ups, they generally do not have ready cash to pay your fee. You have to make a living, though, and you have to pay your employees. In order to get paid, you have developed the following strategy. And, since you have a number of years of experience, you can usually tell which clients are going to be successful.

You generally assess the client and do one of the following before starting work:

1. Demand payment up front
2. Accept a written note payable which is due within one year
3. Accept stock in the company in lieu of payment

Here are the client files that are on your desk right now:

1. Angela and Jason Freeman are young farmers. Jason comes from a long line of Texas farmers. Jasons grandfather owned seven sections (7 square miles) of farmland, but Jasons dad has a good job and does not farm. Jason had worked with his grandfather since junior high and when Jasons is grandfather died, Jason had an opportunity to rent the land from his dad and aunt. Jason farmed cotton and wheat like his grandfather for the first year, but it wasnt profitable because of market conditions. So, Jason researched for other suitable crops considering the soil and climate conditions.

Jason has decided to grow hops. Hops are an ingredient in beer and with the growth of the local brewery industry, Jason thinks that there is a market in Texas for locally grown hops. Most of the hops grown in the US are currently grown in the Northeast. Hops are heat-resistant and generally resistant to disease and would probably grow better in Texas.

Angela and Jason primarily handle the farm themselves, though they brought in some help at harvest last year when they grew cotton and wheat. Once the hop farming starts, they will need a lot more assistance. Most of the weeding and harvesting will have to be done by hand. They need to purchase one big piece of equipment, a hops harvester/combine.

1. (no points) Which payment option are you going to offer Angela and Jason?

2. (10 points) Angela and Jason need to know which entity type would be best for this new business. Explain their best options for an entity.

Here are their concerns:

#1 They do not want to give up control of the business. They are not opposed to having another owner or two, but the other owners cannot have any management control

#2 They need some liability protection for two reasons:

1. Hops could potentially be classified as food items. Right now, they are exempt because the primarily go into beer and the alcohol in beer kills any germs, but you never know about the future.
2. There will be a number of employees and independent contractors working in and for the business if everything goes well.

3. (10 points) Angela and Jason need to know how classify workers as employees or independent contractors. What are the factors they should use to make the determination?
4. There is a cost difference to the employer in classifying workers as employees or independent contractors. Employers are supposed to classify employees based on factors other than cost.
5. (3 points) Which type of worker classification has additional costs to the employer?

2. (6 points) Name two of the additional costs associated with that type of worker classification.