Answer:
BC's net income = $395,000 - $245,000 = $150,000
A) if BC is a sole proprietorship, then the owner will pay income tax for the complete net income = $150,000 x 33% = $49,500
B) if BC is operated as a corporation, then the owner will only pay taxes on the salary earned = $100,000 x 33% = $33,000.
But the corporation will have to pay corporate taxes for its new net income = $150,000 - $100,000 = $50,000 x 21% (current corporate tax rate) = $10,500
Retained earnings = $50,000 - $10,500 = $39,500. When BC distributes its earnings, the owner will have to pay income taxes for the dividends received.
total taxes paid = $33,000 + $10,500 = $43,500, but in the future it will pay an additional $13,035 in taxes (= $39,500 x 33%)
C) if BC is operated as a corporation and no salaries are paid, then it will only pay corporate taxes = $150,000 x 21% = $31,500. When BC distributes its dividends, the owner will have to pay income taxes.
total taxes paid = $31,500 but in the future it will pay an additional $39,105 in taxes [= ($150,000 x 79%) x 33%)]
D) if BC is operated as a corporation, then the owner will only pay taxes on the salary earned = $100,000 x 33% = $33,000.
But the corporation will have to pay corporate taxes for its new net income = $150,000 - $100,000 = $50,000 x 21% (current corporate tax rate) = $10,500
Retained earnings = $50,000 - $10,500 = $39,500. When BC distributes its earnings, the owner will have to pay income taxes = $39,500 x 33% = $13,035
total taxes paid = $33,000 + $10,500 + $13,035 = $56,535
E) If Mr. Benton decides to change his sole proprietorship into a corporation, he will pay more taxes. If he wants to pay less taxes, the best option is to keep the company as a sole proprietorship. If he is worried about unlimited liability, he should change his company into a limited liability partnership or limited liability company, the problem is that he will need to find a partner (maybe his wife or a son/daughter).
