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Sandy is planning to start a new business venture and must decide whether to operate as...

Sandy is planning to start a new business venture and must decide whether to operate as a sole proprietorship or C corporation. She projects that the business will generate annual cash flow and taxable income of $100,000. Sandy’s personal marginal tax rate is 37 percent based on compensation income she receives from other sources of $275,000. (Ignore any employment tax consequences, in other words do not include in your answer any calculations regarding payroll taxes.)

  1. If Sandy operates the business as a sole proprietorship, calculate the annual after-tax cash flow available for reinvestment in the business venture. Assume the sole proprietorship will qualify for the 20 percent Section 199A deduction.
  1. If Sandy operates the business as a regular C corporation that makes no dividend distributions, calculate the annual after-tax cash flow available for reinvestment in the business.
  1. Suppose Sandy wishes to withdraw $20,000 per year from the business and will reinvest any remaining after-tax earnings.
    1. What are the tax consequences to Sandy and the business of such a withdrawal if the business is operated as a sole proprietorship?
    2. How much after-tax cash flow will remain for reinvestment in the business?
    3. How much after-tax cash flow will Sandy have from the withdrawal?
  1. What are the tax consequences to Sandy and the business of a $20,000 withdrawal in the form of a dividend if the business is operated as a C corporation?
    1. How much after-tax cash flow will remain for reinvestment in the business?
    2. How much after-tax cash flow will Sandy retain from the dividend?
  1. If Sandy wants to operate the business as a corporation but also wants to receive cash flow from the business each year, what would you recommend to obtain a better tax result?

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