Question

Class, Let's work on this together. Becca would like to organize BMI as either an LLC or as a C corporation generating a 4 percent annual before-tax rate of return on a $450,000 investment. Individual ordinary rates are 28 percent, corporate rates are 15 percent, and individual capital gains and dividends tax rates are 15 percent. BMI will distribute its earnings annually to either its members or shareholders. a. Ignoring self-employment taxes, how much would Becca keep after taxes if BMI is organized as either a LLC or as a C corporation

Answer 1

LLC Description C Corp. Description

(1) Pretax earnings $18,000 4%*$450,000 $18000 4%*$450,000

(2) Entity level tax 0 $2,700 15% × (1)

(3) After-tax entity earnings $18,000 (1) – (2) $15,300 (1) – (2)

(4) Owner tax $5,040 (3)*28% $2,295 (3)* 15%

(5) After-tax earnings $12,960 (3)- (4) $13,005 (3) – (4)