The Big Idea Company is in its development stage and is deciding how to formally/legally organize its
Question:
- The Big Idea Company is in its development stage and is deciding how to formally/legally organize its business venture. The founder, James, is considering organizing as either a limited liability company (LLC) or as a corporation. He expects revenues to be $2 million next year with total expenses amounting to $1.625 million resulting in a taxable income of $375,000. James is interested in estimating his federal income tax liability for 2018 based on the 2018 tax brackets shown below.
| Marginal Tax Rate | Single | Married Filing Jointly | Head of Household | Married Filing Separately |
| 10% | $0 - $9,525 | $0 - $19,050 | $0 - $13,600 | $0 - $9,525 |
| 12% | $9,525-$38,700 | $19,050-$77,400 | $13,600-$51,800 | $9,525-$38,700 |
| 22% | $38,700-$82,500 | $77,400-$165,000 | $51,800-$82,500 | $38,700-$82,500 |
| 24% | $82,500-$157,500 | $165,000-$315,000 | $82,500-$157,500 | $82,500-$157,500 |
| 32% | $157,500-$200,000 | $315,000-$400,000 | $157,500-$200,000 | $157,500-$200,000 |
| 35% | $200,000-$500,000 | $400,000-$600,000 | $200,000-$500,000 | $200,000-$300,000 |
| 37% | Over $500,000 | Over $600,000 | Over $500,000 | Over $300,000 |
1. Calculate the amount of federal income tax that James would pay if Big Ideas is organized as a limited liability company (LLC). You may assume James files as a single tax payer. What would be the average tax rate for taxable income of $375,000?
| Personal Marginal Tax Rate | Personal Taxable Income-a) | Personal Amount of Taxes |
| 10.0% | $ 9,525 | $ 952.50 |
| 12.0% | 29,175 | 3,501.00 |
| Total Taxable Income |
2. Calculate the amount of federal income tax that the Capital-Ideas Company would have to pay if the venture is organized as a regular corporation. [Remember the 2018 Federal income tax rate for 2018 is a flat 21%.]
| Corporate Taxable Income | Corporate Tax Rate | Corporate Amount of Taxes |
3. If the Capital-Ideas Company is organized as a corporation and all after-tax profits are paid out as dividends to James (filing single), what additional personal income taxes would James pay? What would be the average tax rate on this personal income received from the corporation?
| Personal Marginal Tax Rate | Personal Taxable Income-a) | Personal Amount of Taxes |
| Total | ||
| Average Tax Rate -b) | ||
4. Based on your calculations, would James choose to organize as a LLC or a corporation. Why?
Also, explain why James might decide not to distribute all after tax profits of Capital-Ideas as dividends.
Expert Answer:
Entrepreneurial Finance
ISBN: 978-0538478151
4th edition
Authors: J . chris leach, Ronald w. melicher
