New Business is just being formed by 10 investors, each of whom will own 10% of
ID: 2752841 • Letter: N
Question
New Business is just being formed by 10 investors, each of whom will own 10% of the business. The firm is expected to earn $1,000,000 before taxes each year. The corporate tax rate is 34% and the personal tax rate for the firm's investors is 35%. The firm does not need to retain any earnings, so all of its after-tax income will be paid out as dividends to its investors. The investors will have to pay personal taxes on whatever they receive. How much additional spendable income will each investor have if the business is organized as a partnership rather than as a corporation?
a. $20,800 b. $22,100 c. $20,384 d. $21,225 e. $21,658Explanation / Answer
Income if formed as corporation in hands of each shareholder = 1,000,000* 10% ( 1- .34 ) (1- .35)
= 100,000* .66*.65
= $ 42900
Income if formed as partnership
Income will be taxable in hands of partner = 1,000,000 *10% *(1-.35)
= 100,000 *.65
= 65000
Additional income = 65000 -42900 = 22100
correct option is "B"
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