Richard plans to invest $100,000 for a 50 percent interest in a small business. His friend Jack will also invest $100,000 for the remaining 50 percent interest. On their investment, they expect to generate 10 percent before-tax return the first year. Richard's marginal tax rate is 33 percent, and Jack's marginal tax rate is 35 percent. They need to decide whether to establish the business as a partnership or as a C corporation.
1. If they establish a partnership, compute the after-tax cash flow for each partner if each of them withdraws $4,000 from the profits of the business the first year. What is the amount of cash that remains in the partnership, exclusive of employment taxes.
2. If they establish a C corporation, compute the after-tax cash flow for each shareholder if each of them receives a dividend of $4,000 from the profits of the business the first year. What is the amount of cash that remains in the C corporation?
3. What nontax factors should Richard and Jack consider when making this decision?
4. After a detailed analysis, what would you recommend? Do you feel Richard and Jack should establish a partnership or a C corporation?© BrainMass Inc. brainmass.com October 16, 2018, 8:40 pm ad1c9bdddf
Questions 1 and 2 are answered on the attached excel.
3. The types of non-cash questions the partners/shareholders should ask themselves include
a. are they ready for the formality and expense of setting up a C-corporation?
b. do they understand that the corporation becomes an 'artificial person' under the law and therefore a separate legal entity from themselves
c. do they need the liability protection a corporation can offer to its shareholders?
d. do they understand that they can only draw funds from the corporation as wages or (double-taxed) dividends
e. do they realized that a C corporation has advantages for growth potential with the addition of investors who can remain passive (not involved in daily operations). This is a control issue.
f. they should understand the formality of liquidation of a ...
This problem is a relatively complex comparison of a partnership as opposed to a corporate form. Not only is tax calculated, but nine other business issues are discussed in response to question 3. Further discussed is the possibility of becoming an "S" corporation.
Human Resource: 4 questions
See attached files.
1. 'What's happened to Bob?' was the question asked Jack Otto, production supervisor, by one of his manufacturing workers, Clyde Fisher. Jack had been wondering the same thing for several weeks about Bob Hill, another of his welders.
Jack Otto is a 54-year-old production supervisor who has been with Store Fixture Manufacturing Co. SFM for 20 years. He is well liked and respected by his peers and subordinates and is very competent at the technical aspects of his supervisory job.
Bob Hill, 40 years old, has been a generally competent and productive welder at SFM for ten years. Bob has been popular with his co-workers. Although he periodically 'blows up' at them, he always apologizes afterwards. His absenteeism rate has been higher than average for the last several years, with most absenteeism on Mondays. Also, it is not uncommon for Bob to be 10-15 minutes late at least once a week. But, because of a shortage of experienced welders and because Bob often cuts his lunch hour short to make up his tardiness time, Jack and other managers at SFM have decided to live with Bob's attendance problems as long as they don't become extensive.
It is not uncommon for many company employees to stop for a beer after work. Clyde told Jack that Bob has been staying at the neighborhood bar for several hours after work most nights. Clyde also said he had heard rumors that Bob Hill was having personal problems at home.
Jack doesn't like to pry into the lives of his workers, but he knows that he can't ignore the situation much longer, especially with the others beginning to talk about Bob's problem.
Questions: What actions, if any, should Jack Otto take? Identify some ways that the company and Jack have contributed to the existing problem with Bob.
2. The importance of security to protect proprietary or sensitive information drives companies to establish elaborate practices (at COMSUBLANT, a retina scanner "guarded" the entrance to the Admiral's staff area). The attached article describes implantation of an RFID chip under the skin of employees, a new way to let only authorized personnel into controlled spaces. Are there other issues raised by this type of technology? If CityWatcher.com requires the implant as a condition of employment, what ramifications might develop?
3. The attached article from Business Week gives the story of Sharon Spangler who lost her job at a Chrysler plant when she was accused of murdering her husband. There are many policy implications in the story. What do you think should be the result of her current suit? How well do you think Daimler-Chrylser's policies supported their HR action?
4. Check out the attached short article from The Wall Street Journal's Career Journal. HR is the basic advisor for all employee benefits. Those of you in the military you might recall very strict documentation requirements for items like SGLI elections and other benefits. HR has to make sure the company gives the straight scoop to its departing employees, and documentation will prevent liability for inadequate advising.Should HR be able to force departing employees to make a specific choice about retirement options?View Full Posting Details