(answered) Agatha is planning to start a new business

venture and

Agatha is planning to start a new business venture and must decide whether to operate as a
sole proprietorship or incorporate. She projects that the business will gener
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business-venture-and

Agatha is planning to start a new business venture and must decide whether to operate as a
sole proprietorship or incorporate. She projects that the business will generate annual cash flow
and taxable income of $100,000. Agatha’s personal marginal tax rate, given her other sources
of income, is 39.6 percent.

a. If Agatha operates the business as a sole proprietorship, calculate the annual after-tax cash
flow available for reinvestment in the business venture.

b. If Agatha operates the business as a regular (C) corporation that makes no dividend
distributions, calculate the annual after-tax cash flow available for reinvestment in the business.

c. Now suppose that Agatha wishes to withdraw $20,000 per year from the business, and will
reinvest any remaining after-tax earnings.

What are the tax consequences to Agatha and the business of such a withdrawal if the business
is operated as a sole proprietorship? How much after-tax cash flow will remain for reinvestment
in the business? How much after-tax cash flow will Agatha have from the withdrawal?

d. What are the tax consequences to Agatha and the business of a $20,000 withdrawal in the
form of a dividend if the business is operated as a C corporation? How much after-tax cash flow
will remain for reinvestment in the business? How much after-tax cash flow will Agatha retain
from the dividend?

e. If Agatha wishes to operate the business as a corporation but also wishes to receive cash
flow from the business each year, what would you recommend to get a better tax result?

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business-venture-and

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