Problem #1 Comparing LLCs to C Corporations

Ms. Mills recently started a new business venture and must decide whether to operate as an LLC or incorporate it (as a C corporation). She projects that the business will generate $100,000 of cash flow and pretax ordinary business income per year. Ms. Mills ordinary income tax rate is 25% and her dividend tax rate is 15%. The corporate tax rate is 21%. Ignore self-employment/payroll tax and the QBI deduction.

a.) Compare the combined (business entity + individual)after-tax cash flow between the LLC and C corporation scenarios assuming Ms. Mills plans to distribute all post-tax profits from the business at the end of each year.

b.) Compare the combined after-tax cash flow between the LLC and C corporation scenarios assuming Ms. Mills plans to pay herself a $40,000 salary in the C corporation scenario, and then distribute all post-tax profits from the business at the end of each year.

c.) Now imagine that Ms. Mills plans to keep all cash flow in the business for reinvestment (i.e., she will make no withdrawals and pay no dividends from the business). Compare the after-tax cash flow available for reinvestment if Ms. Mills operates the business as an LLC compared to a C corporation.

(please show work)