Question: Mrs. Tran and Mrs. Nutter each own a small business that averages $80,000 annual income. Each woman is in the 35 percent marginal tax bracket.

Mrs. Tran and Mrs. Nutter each own a small business that averages $80,000 annual income. Each woman is in the 35 percent marginal tax bracket. Mrs. Tran has decided to incorporate her business as a taxable corporation, while Mrs. Nutter has decided to continue to operate as a sole proprietorship. Both decisions maximize the after-tax value of the business to its owner. How can you explain this apparent contradiction?

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