Question

3. You are a shareholder in a corporation. The corporation earns $2 per share before taxes. Once it has paid taxes it will distribute the rest of its earning to you as a dividend. The corporate tax rate is 35% for all income and the personal tax rate on income is 25% for all income levels. How much is left for you per share that you own after all taxes have been paid assuming this corporation is organized as a c-corporation How much is left for you per share that you own after all taxes have been paid assuming this corporation is organized as an s-corporation and chooses to be taxed as a partnership. a. b.

Answer 1

a)	If a C-Corporation, the income suffers double
	taxation, first at the corporate level and then at the
	shareholders' personal level.
	Hence, the net amount received per share after all
	taxes = 2*(1-35%)*(1-25%) =	$               0.98
b)	If an S-Corporation taxes are paid only at the
	shareholders' personal level.
	Hence, the net amount received per share after all
	taxes = 2*(1-25%) =	$               1.50