Final answer:
If BAL is organized as an LLC, Sandra would receive $19,656 after taxes in the first year. If BAL is organized as a C corporation and all earnings are distributed as dividends, Sandra would receive $25,284 after taxes in the first year.
Step-by-step explanation:
If Sandra organizes BAL as an LLC, she will have to pay self-employment tax and additional Medicare tax. The self-employment tax for an LLC is 15.3%, which includes the total social security tax (12.4%) and Medicare tax (2.9%). In this case, the taxes paid would be calculated as follows:
Gross annual return: $600,000 x 7% = $42,000
Self-employment tax: $42,000 x 15.3% = $6,426
Additional Medicare tax: $42,000 x 0.9% = $378
Income tax (37%): $42,000 x 37% = $15,540
Net income after taxes, self-employment tax, additional Medicare tax, and income tax: $42,000 - $6,426 - $378 - $15,540 = $19,656
If BAL is organized as a C corporation, the corporate income tax rate is 21%. In this case, the taxes paid would be calculated as follows:
Net income after taxes (C corporation): $42,000 x (1 - 0.21) = $33,180
Dividend tax on C corporation: $33,180 x 23.8% = $7,896
Dividend after taxes (C corporation): $33,180 - $7,896 = $25,284