Megan operates a house-cleaning business as a sole proprietorship. She oversees a team of 10 cleaning personnel, markets the business, and provides supplies and equipment. The business has been generating net taxable profits of $50,000 per year.
a. Assume that Megan’s marginal tax rate on ordinary income is 35 percent and that she has no pressing need for cash flow from this business. Should Megan consider incorporating and operating the business through a C corporation? Provide calculations to support your conclusion. (Ignore any payroll or self-employment tax considerations.)
b. How would your conclusion in part change if Megan’s marginal tax rate is only 28 percent?