Question: suppose you are preparing to scale up your sole proprietorship...
Suppose you are preparing to scale up your sole proprietorship after many successful years of business. After discussion with your lawyers, accountants and fiancial consultants you find yourself choosing between two types of firm structures: C-Corporation and S-Corporation. Regardless you intend to hold on to 60% of the ownership and therefore can claim 60% of the dividend income. At your current income level your personal income tax rate is 20%. Suppose the corporate tax rate is 40%. Use this spreadsheet to evaluate the after-tax income and effective tax rate for each corporate structure if the total dividend payout is $1,000.
|C corporation||S corporation|
|corporate earnings before tax||1000||1000|
|number of shares||100||100|
|your number of shares||60||60|
|earnings per share|
|corporate tax rate||0.4||0.4|
|corporate tax payment|
|after-tax per share corporate income to distribute|
|personal income tax rate||0.2|
|personal income tax payment|
|after tax earnings|
|effective tax rate|
|your total dollar amount of dividend income|