Marsha is ready to start a new business that will generate
about $150,000 of earnings each year. Marsha will work full time for the
business. Her plan is to withdraw $100,000 of earnings from the business each
year to fund her personal needs. She will leave the remaining earnings in the
business to retire debt and fund future needs of the business. Marsha wants to
minimize the overall tax bite on these earnings. What will be the total entity
and personal tax cost under each of the following scenarios, assuming Marsha’s
ordinary income tax rate is 25 percent, her dividend rate is 15 percent, and
the applicable self-employment/payroll tax rate is 15.3 percent? Ignore all
potential state income tax consequences.
1. Marsha’s business is a C corporation that distributes
Marsha a $100,000 dividend each year.
2. Marsha’s business is a C corporation that pays Marsha a
salary of $100,000 each year for services she renders to the corporation?
3. Marsha’s business is an S corporation that pays Marsha a
$40,000 salary each year and distributes a $60,000 dividend to Marsha each
year.
4. Marsha’s business is a limited liability company that is
taxed as a partnership. Marsha owns 90 percent of the business, and Joe, an
investor who does not work in the business, owns the remaining 10 percent. The
LLC distributes $90,000 to Marsha each year and $10,000 to Joe. Assume Joe’s
marginal tax rate is also 25 percent.
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