The owner of WebCity is trying to decide whether to remain a proprietorship or t

Question

The owner of WebCity is trying to decide whether to remain a proprietorship or to incorporate. Suppose that the corporate tax rate on profits is 30 percent and the personal income tax rate is 40 percent. For simplicity, assume that all corporate profits (after corporate taxes are paid) are distributed as dividends in the year they are earned and that such dividends are subject to tax at the personal income tax rate. If the owner of WebCity expects to earn $115,000 in before-tax profits this year, regardless of whether the firm is a proprietorship or a corporation, which method of organization should be chosen'? What is the dollar value of the after-tax advantage of this form of organization? $ Suppose that tax policy is changed to completely exempt from personal taxation the first $35,000 per year in dividends (or profits), which method of organization should be chosen? Suppose that the corporate form of organization has cost advantages that will raise before-tax profits by $60,000. Should the owner of WebCity incorporate? By how much would after-tax profits change due to incorporation? $ How can you explain the fact that even though corporate profits are subject to double taxation, most business in the United States is conducted by corporations rather than by proprietorships or partnerships? O A. A corporate structure guarantees higher profits. O B. A corporate structure provides limited liability for owners. O C. A proprietorship structure provides limited liability for owners O D. None of the above.

Explanation / Answer

Ans

1 proprietorship as it will save him from profits tax

2 (40%+30%)(11500)-40%(115000)=80500-46000=34500

3 yes because profits after tax justify such policy

4 60000-30%(60000)=42000

5 B is right. It thus makes it less rusky

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