Andrea would like to organize SHO as either an LLC (taxed as a sole proprietorsh
ID: 2336229 • Letter: A
Question
Andrea would like to organize SHO as either an LLC (taxed as a sole proprietorship) or a C corporation. In either form, the entity is expected to generate an 12 percent annual before-tax return on a $380,000 investment. Andrea’s marginal income tax rate is 35 percent and her tax rate on dividends and capital gains is 15 percent. Andrea will also pay a 3.8 percent net investment income tax on dividends and capital gains she recognizes. If Andrea organizes SHO as an LLC, Andrea will be required to pay an additional 2.9 percent for self-employment tax and an additional 0.9 percent for the additional Medicare tax. Further, she is eligible to claim the full deduction for qualified business income. Assume that SHO will pay out all of its after-tax earnings every year as a dividend if it is formed as a C corporation. (Round your intermediate computations to the nearest whole dollar amount.)
a. How much cash after taxes would Andrea receive from her investment in the first year if SHO is organized as either an LLC or a C corporation?
b. What is the overall tax rate on SHO’s income in the first year if SHO is organized as an LLC or as a C corporation? (Round your final answers to 2 decimal places.
LLC??
C Corp??
Explanation / Answer
A C corporation, under United States federal income tax law, refers to any corporation that is taxed separately from its owners. A C corporation is a corporation in which the owners, or shareholders, are taxed separately from the entity. C corporations, the most prevalent of corporations, are also subject to corporate income taxation. The taxing of profits from the business is at both corporate and personal levels, creating a double taxation situation.
A limited liability company is a corporate structure whereby the members of the company are not personally liable for the company's debts or liabilities. Limited liability companies are hybrid entities that combine the characteristics of a corporation and a partnership or sole proprietorship. While the limited liability feature is similar to that of a corporation, the availability of flow-through taxation to the members of an LLC is a feature of partnerships.
Return on Investments :-
$380,000*12/100 = $45,600
15% of $45,600 = $6,840 is Capital gain
Return after taxes to be received from Andrea is $38,760 ($45,600-$6,840).
3.8% of $45,600 income tax is $1,732.8
Adrea will receive $38,760-$1,732.8 = $37,027.2
15.3%
LLC owners also get to deduct half of the total amount from their taxable income, which saves a few tax dollars The self-employment tax rate for business owners is 15.3% of net income up to an annual threshold and then 2.9% for income above the threshold amount.