You are the tax partner in your own small accounting firm and you have just finished a meeting with a new client, who also happens to be your long-time friend, Kelly Thomas. You have known Kelly a long time and she has always been a very health-conscious person. While you were completing a Bachelor of Commerce degree with an accounting major in University, Kelly studied nutrition and completed a Culinary Arts program. Therefore, it only seems natural that Kelly has decided to start her own business, a vegan bakery. Kelly came to you for taxation advice related to her new business venture.

During your meeting, you gather the following information about Kelly and her proposed business:

• Kelly is married to Frank Thomas.
• Frank earns approximately $200,000 per year in employment income as a business executive.
• Kelly and Frank have one child, a five year old daughter named Lucy.
• Frank’s brother, Fred, is a vegan and always complained that there was no place where he could satisfy his sweet-tooth while staying true to his vegan diet. After tasting Kelly’s vegan baking, Fred suggested that Kelly start her own vegan bakery.
• Fred has promised a $200,000 loan to help Kelly start her business. As a condition of the loan, Fred would like some say in the operation of the bakery.
• Kelly is happy to have Fred’s assistance as he has experience in drafting contracts and other legal agreements for various small businesses.
• Kelly expects revenue of about $250,000 in two years with a net profit before tax of $50,000.

Required:

Prepare a memo to Kelly indicating the best organizational structure for her new business. For each type of organizational structure (proprietorship or corporation) include tax related advantages and disadvantages as well as other (legal, financial, etc.) advantages and disadvantages. Provide a conclusion on which alternative is best for Kelly and why.