Question

Suppose you are preparing to scale up your sole proprietorship after many successful years of business. After discussion with your lawyers, accountants and fiancial consultants you find yourself choosing between two types of firm structures: C-Corporation and S-Corporation. Regardless you intend to hold on to 60% of the ownership and therefore can claim 60% of the dividend income. At your current income level your personal income tax rate is 20%. Suppose the corporate tax rate is 40%. Use this spreadsheet to evaluate the after-tax income and effective tax rate for each corporate structure if the total dividend payout is $1,000.

	C corporation	S corporation
corporate earnings before tax	1000	1000
number of shares	100	100
your number of shares	60	60
earnings per share
corporate tax rate	0.4	0.4
corporate tax payment
after-tax per share corporate income to distribute
personal income tax rate	0.2
personal income tax payment
after tax earnings
effective tax rate
your total dollar amount of dividend income

Answer 1

C Corp	S Corp
EPS: 1000/100= 10	1000/100= 10
corporate tax pay= 40%= $400	corporate tax pay= 40%= $400
income to distribute= $600	income to distribute= $600
personal tax = 20%= 120	personal tax= 0
after tax earnings= $480	after tax earnings= $600
effective tax rate= 52%	effective tax rate= 40%
total dollar income= $288	total dollar income= $360