Question

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Andrea would like to organize SHO as either an LLC or as a C corporation generating an 4 percent annual before-tax return on a $320,000 investment. Assume individual and corporate tax rates are both 35 percent and individual capital gains and dividend tax rates are 15 percent. SHO will pay out its after-tax earnings every year as a dividend if it is formed as a C corporation. Assume Andrea is the sole owner of the entity. Ignore self-employment taxes, the additional Medicare tax, and the net investment income tax.

b. What are the overall tax rates if SHO is organized as either an LLC or as a C corporation? (Round your answers to 2 decimal places.)

LLC

C Corportation

Answer 1

LLC = 35%

C.corp = 44.75%

to know the overall tax rate, we need to make the following calculation:

	LLC	C corp
1.Pretax earnings (320,000*4% , 320,000*4%)	12,800	12,800
2.tax on llc / c .corp (llc nil) (c corp = 12,800 *35% corp tax rate)		4,480
3.After tax earning	12,800	8,320
4.individual tax in hands of owner (llc = 12,800*35% individual tax rate) (c corp = 8,320 * 15% dividend tax rate)	4,480	1,248
5.after tax individual earnings	8,320	7,072
6.tax rate (llc = ((12,800-8,320) / 12,800) (c corp = ((12,800-7,072)/12,800)	35%	44.75%