RESEARCH PROJECT 2 PROMPT
For this research project, you will consider a very practical question. While it mayinitially seem unrelated to the Christian worldview, as you study it, you will see that it has deep implications for the Christian businessperson and the Kingdom of God. The issue is: “which form of business organization is best for a client in a given situation and how should that entity be taxed?”
As noted, at first blush, this very practical question may seem to have very little to do with the Christian worldview. That conclusion, however, would be in error. The Bible is a very practical book and it is concerned with every facet of our lives. There is no part of the universe over which Jesus is not Lord (See, e.g., Matthew 28:18). Accordingly, there is no part of our lives with which He is not concerned.
Further, we as Christians should be good stewards of what God has given us, and we should be about the business of being fruitful and multiplying and taking dominion over the Earth (See, e.g., Genesis 1:28–31, 9:1 and 7). A primary means for accomplishing these goals is through just commercial activity conducted through business enterprises.
Consider this: the Pilgrims and Puritans who settled what is now Massachusetts did so via the business organization known as a Joint Stock Company. Business enterprises have developed cures for various diseases. They have built skyscrapers that tower over the landscape like mountains and dug vast tunnels under the sea beds. Businesses have been essential in accomplishing this amazing level of dominion over the earth and helping us to be fruitful and multiply and fill the earth just as God commanded.
Therefore, choosing the right business organization form and tax regime for a new business is very much a God-honoring endeavor. With that said, now consider the following fact pattern for this research project:
Alex, Bill, Carl, and Devon inherit from their Dad an operating organic farm in New State. The farm includes an orchard, various vegetable garden tracts, fields usually planted in grains, several trout ponds, and a poultry operation. In addition to selling the various organic products, the farm usually invites the public in each year during the fall for a corn maze, pumpkin patch, and other amusements. Alex, Bill, Carl, and Devon were never interested in farming, so their cousin, Xavier, was trained to run the farming operation by Dad and has been helping Dad do so for the past 5 years. Xavier wants to continue to do that, and Alex, Bill, Carl, and Devon are willing for him to continue to do that. Therefore, they want to form a business entity to own the farm, which Dad ran as a sole proprietorship. Obviously, they don’t want a lot of formalities or complexities to “fool with” since they want Xavier to handle the day-to-day operations of the farm. Further, they want to minimize their taxes on the entity, they want to avoid any personal liability from the farming operations, and they want to keep the business in the family (it might be fine to sell interests in the business to their kids or to Xavier, but they would not want a stranger owning part of the business).
They have discussed the deal with Xavier, and he is very excited. In fact, he proposes that the business borrow an additional $500,000 and expand its operations to include a vineyard. There is a bank willing to offer financing, but Alex, Bill, Carl, and Devon would have to be willing to sign personal guarantees. They are still thinking it over, but they probably will proceed with Xavier’s plan for expansion.
They want you to be their accountant in New State, and therefore they come to you for advice as to which would be the best form of business organization to use for operating of the farm.
Alex, Bill, Carl, Devon, and Xavier are all Christians and want their business to be organized and operated in accordance with the Christian worldview.
In view of their situation described above, which form of business organization would you recommend? Explain fully, including the strengths and weaknesses of each form of business organization and be sure to make application to the specific facts of this situation. Assume for the purposes of this assignment that New State has typical statutes governing business organizations and that New State’s taxation of business organizations follows the federal regime.
Suggest Helpful Resources:
For an excellent article discussing the relative advantages and disadvantages of s-corporation taxation and partnership taxation, see Walter D. Schwidetzky, Integrating Subchapters K and S—Just Do It, 62 Tax Law. 749 (2009).For an excellent discussion of one of the primary benefits of s-corporation taxation for many closely held businesses, the minimization of employment taxes, see Timothy M. Todd, Multiple-Entity Planning to Reduce Self-Employment Taxes: Recent Cases Demonstrate the Pitfalls and How to Avoid Them, 13 Journal of Tax Practice & Procedure 31 (April/May 2011).