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Shawn Bates 400000

Price: $2.50


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 income
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. Write a memo explaining the advantages and disadvantages
of these two forms of business organization. Explain why a limited liability company
may be a better choice than either a partnership or a corporation.

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