Plum Corporation will begin operations on January 1. Earnings for the next five years are projected to be relatively stable at about $77,000 per year. The shareholders of Plum are in the 33% tax bracket and dividends are taxable at 15%.

a. Assume that Plum will reinvest its after-tax earnings in the growth of the company.

If Plum operates as a C corporation, the corporation's income tax will be $, and the shareholders' liability will be $. If Plum operates as an S corporation, the corporation's income tax will be $ and the shareholders' liability will be $.

Therefore, viewed from an entity-owner perspective, operating as a C corporation will result in overall tax savings.

b. Assume that Plum will distribute its after-tax earnings each year to its shareholders.

If Plum operates as a C corporation, the corporation's income tax will be $, and the shareholders' liability will be $. If Plum operates as an S corporation, the corporation's income tax will be $ and the shareholders' liability will be $.

Therefore, viewed from an entity-owner perspective, operating as a C corporation will result in overall tax savings.