Agatha is planning to start a new business venture and must decide whether to operate as a
Question:
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. If Agatha 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.
c. Now suppose that Agatha wishes to withdraw $20,000 per year from the business, and will reinvest any remaining after-tax earnings.
What are the tax consequences to Agatha and the business of such a withdrawal if 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?
d. What are the tax consequences to Agatha and the business of a $20,000 withdrawal in the form of a dividend if the business is operated as a C corporation? How much after-tax cash flow will remain for reinvestment in the business? How much after-tax cash flow will Agatha retain from the dividend?
e. If Agatha wishes to operate the business as a corporation but also wishes to receive cash flow from the business each year, what would you recommend to get a better tax result?
Corporation
A Corporation is a legal form of business that is separate from its owner. In other words, a corporation is a business or organization formed by a group of people, and its right and liabilities separate from those of the individuals involved. It may... Dividend
A dividend is a distribution of a portion of company’s earnings, decided and managed by the company’s board of directors, and paid to the shareholders. Dividends are given on the shares. It is a token reward paid to the shareholders for their...
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Related Book For
Principles Of Taxation For Business And Investment Planning 2016 Edition
ISBN: 9781259549250
19th Edition
Authors: Sally Jones, Shelley Rhoades Catanach
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