Question

Using PowerPoint or Word shapes diagram the establishment of BAL in Question 46 under both scenarios as an LLC or a C Corporation.

(Question 46: Amanda would like to organize BAL as either an LLC (taxed as a sole proprietorship) or a C corporation. In either form, the entity is expected to generate an 8 percent annual before-tax return on a $500,000 investment. Amanda’s marginal income tax rate is 37 percent and her tax rate on dividends and capital gains is 23.8 percent (including the 3.8 percent net investment income tax). If Amanda organizes BAL as an LLC, she will be required to pay an additional 2.9 percent for self-employment tax and an additional .9 percent for the additional Medicare tax. Also, she is eligible to claim a full deduction for qualified business income on BAL’s income. Assume that BAL will distribute half of its after-tax earnings every year as a dividend if it is formed as a C corporation.

a) How much cash after taxes would Amanda receive from her investment in the first year if BAL is organized as either an LLC or a C corporation?

b) What is the overall tax rate on BAL’s income in the first year if BAL is organizedas an LLC or as a C corporation?)

Answer 1

Option 1 - Corporation
Particulars	Amount
Investment	500000
Earning before tax	40000
Less : Taxes @37%	14800
Earning after tax	25200
Retained earning	25200
Dividend	12600
Less : Taxes @23.8%	2998.8
Cash from investments	9601.2
Over all tax rate	44.50%
Option 2 - LLC
Particulars	Amount
Investment	500000
Earning before tax	40000
Less : Taxes @37%	14800
Self - employment tax	1160
Medicare tax	360
Cash from investments	23680
Over all tax rate	40.80%