Question

New Business is just being formed by 10 investors, each of whom will own 10% of the business. The firm is expected to earn $500,000 before taxes each year. The corporate tax rate is 34% and the personal tax rate for the firm's investors is 35%. The firm does not need to retain any earnings, so all of its after-tax income will be paid out as dividends to its investors. The investors will have to pay personal taxes on whatever they receive. How much additional spendable income will each investor have if the business is organized as a partnership rather than as a corporation

Answer 1

Answer:

$11,050

Explanation:

The additional spendable income will be calculated as follows:

As a corporation: $500,000 X (1-34%) X (1-35%) / 10 = $21,450 per investor

As a business: $500,000 X (1-35%) / 10 = $32,500 per investor

Additional spendable income for each investor = $32,500 - $21,450 = $11,050