Andrea would like to organize SHO as either an LLC (taxed as a sole proprietorship)
or a C corporation. In either form, the entity is expected to generate an 11 percent
annual before-tax return on a $250,000 investment. Andrea’s marginal income tax
rate is 35 percent and her tax rate on dividends and capital gains is 15 percent.
Andrea will also pay a 3.8 percent net investment income tax on dividends and capital
gains she recognizes. If Andrea organizes SHO as an LLC, Andrea will be required to
pay an additional 2.9 percent for self-employment tax and an additional .9 percent for
the additional Medicare tax. Further, she is eligible to claim the full deduction for
qualified business income. Assume that SHO will pay out its all of its after-tax
earnings every year as a dividend if it is formed as a C corporation. How much cash
after-taxes would Amanda receive from her investment in the first year if SHO is
organized as an LLC?
INCORRECT ANSWERS SUBMITTED 26535 & 18964
