CH.4 Q. 13

Andrea would like to organize SHO as either an LLC ( taxed as a sole proprietorship ) or a corporation In either form the entity is expected generate an 11 percent annual before-return on a $890,000 investment Andrea's marginal income tax rate is 35 percent and her tax rate on dividends and capital gains is 15 percent . Andrea will also pay a 3.8 percent net investment income tax on dividends and capital gains she recognizes . If Andrea organizes SHO as an LLCAndrea will be required to pay an additional 2.9 percent for self-employment tax and an additional 0.9 percent for the additional Medicare tax. Further she is eligible to claim the deduction for qualified business income . Assume that SHO pay out all of its after tax earnings every year as a dividend if it is formed as a corporation .

REQUIRED

A) How much cash after taxes would Andrea receive from her investment in the first year if SHO is organized as either an LLC or a C Corporation? LLC? C Corporation?

B) What is the overall tax rate on SHOs income in the first year if SHO is organized as an LLC or as a C corporation? (Round to 2 decimal, answer in %)