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

Agatha is planning to start a new business venture and must decide whether to operate as a sole proprietorship or incorporate. She projects that the business will generate annual cash flow and taxable income of $100,000. Agatha’s personal marginal tax rate, given her other sources of income, is 39.6 percent.

a. If Agatha operates the business as a sole proprietorship, calculate the annual after-tax cash flow available for reinvestment in the business venture.

b. Now suppose that Agatha wishes to withdraw $20,000 per year from the business and will reinvest any remaining after-tax earnings. The business is operated as a sole proprietorship. How much after-tax cash flow will remain for reinvestment in the business? How much after-tax cash flow will Agatha have from the withdrawal?

c. If the business is operated as a C corporation and withdrawal in the form of a dividend is made for $20,000, how much after-tax cash flow will remain for reinvestment in the business? Preferential tax rates on dividends are 15 percent and 20 percent, based on their marginal tax rates.

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