Jessica plans to invest $150,000 in her own small business. She expects to generate a 12 percent before-tax return on her investment the first year. Her marginal tax rate is 35 percent because she has a significant amount of income from other sources. She needs to decide whether to establish her business as a sole proprietorship or a C corporation.

a. Compute the after-tax cash flow from a sole proprietorship if she withdraws 50 percent of the profits from the business the first year. (Ignore employment taxes.)

b. Compute the after-tax cash flow from a C corporation if she receives a dividend equal to 50 percent of the before-tax profits from the business the first year.

c. What nontax factors should Jessica consider in making this decision?

d. What do you recommend?

AppendixLO1