Shawn Bates was working to establish a business enterprise with four of his weal

Question

Shawn Bates was working to establish a business enterprise with four of his wealthy friends.
Each of the five individuals would receive a 20 percent ownership interest in the company. A primary goal of establishing the enterprise was to minimize the amount of income taxes paid. Assume that the five investors are taxed at the rate of 15% on dividend income and 30% on all other in-come and that the corporate tax rate is 30 percent. Also assume that the new company is expected to earn $ 400,000 of cash income before taxes during its first year of operation. All earnings are expected to be immediately distributed to the owners. Required
Calculate the amount of after- tax cash flow available to each investor if the business is established as a partnership versus a corporation.

Explanation / Answer

Therefore, profit attributed to per partner after tax if the business is established as a corporation

Cash flow to per partner after tax in case of partnership

Therefore, it is advisable to work as a partnership firm

Corporate Income before tax       400,000 Income tax = 30%       120,000 Distributable profit after tax (a)       280,000 Income allocated to per partner (a/5)        56,000 Less: Income tax on dividend = 15%          8,400

Therefore, profit attributed to per partner after tax if the business is established as a corporation

47,600

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