1. Evon would like to organize SHO as either an LLC or as a C corporation genera

Question

1. Evon would like to organize SHO as either an LLC or as a C corporation generating an 14 percent annual before-tax return on a $380,000 investment. Assume individual and corporate tax ates 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 Evon is the sole owner of the entity. Ignore self-employment taxes, the additional Medicare tax, and the net investment income tax.

a. How much would Evon keep after taxes if SHO is organized as either an LLC or as a C corporation?

b. What are the overall tax rates if SHO is organized as either an LLC or as a C corporation?

Explanation / Answer

a) LLC Corporation Description C corporation   Description 1.Pre tax earnings 53200 (380,000 x 12%) 53200 (380,000 X 12%)

2. Entity level tax 0 --- 18620 (53200 X 35%)

3.After tax entity earnings 53200 (1) - (2) 34580 (1) - (2)

4.Owner tax 18620 (3) X 35% 5187 (3) X 15%

5.After tax earnings 34580 (3) - (4) 29393 (3) - (4)

(b) LLC C corporation

Over all tax rate 35% {(4) / (1)} 44.75% { (2) + (4) / (1) }

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