Dorris Johnson is starting a new business called Marmaduke Consulting Company (MCC). She has a lot of experience working at various airplane manufacturing companies and believes that her experience would be a major benefit to airline carriers who negotiate their own airplane purchase and lease contracts.

MCC will provide aircraft purchase and lease consulting services to airline carriers. Initially, Doris will be the only person working at her company, but she hopes to hire additional consultants and support staff as her business grows. She has enough money to get MCC started but will consider taking on additional investors to accelerate the Company’s growth if things go well. Ms. Johnson realizes she has many important decisions to make and has asked for your advice. She has heard about various business types and would like you to help her determine which legal and tax structure would be best for MCC.

Doris projects that MCC will have net income of $100,000 in its first year of operations before considering any payments to her. If things go as planned, her projections show that the business net income will approximately double each year for the next 10 years. Assume her marginal ordinary income tax rate is 37%, her marginal FICA rate on employee compensation is 1.45%, her marginal self- employment tax rate is 2.9%, and any employee compensation or self-employment income she receives is subject to the .9% additional Medicare tax. Also assume Doris can claim the qualified business income deduction on MCC’s business income, if applicable.

Required

Use the background information to answer the following questions:

Part 1:
Determine Ms. Johnson’s first year after-tax cash flow from the entity’s business income and any compensation she receives from the business under the following assumptions:

1. a) Dorris conducted MCC as an S corporation and she received a salary of $25,000. All business income allocated to her is also distributed to her.

2. b) Dorris conducted MCC as a single-member LLC.

3. c) Dorris conducted MCC as a C corporation and she received a salary of $25,000. All business

   net income is paid to her in the form of a dividend.

Part 2:
What entity/compensation combination generated the most after-tax cash flow for Dorris? What are the primary contributing factors favoring this combination?

Part 3:
What non-tax considerations should Ms. Johnson take into account when deciding which entity/structure would be best for her situation? At a minimum, be sure to consider the nature of her business, her desire to solicit additional investors in the future, and her projected net income growth.

Part 4:
What are your recommendations to Dorris? Discuss the reasoning behind your recommendations.

Answer rating: 100% (QA)

Part 1 a If Dorris conducts MCC as an S corporation and she receives a salary of 25000 her first yea... View the full answer