I am thinking about starting a new business venture and I am trying to decide whether to operate as a sole proprietorship or incorporate. I anticipate the business will generate approximately both annual taxable income
and cash flow of $100,000. At the present time, my personal
marginal tax rate
is 35% and I do not expect that to change with the launch of the new business. One major concern I have is to make sure I have the ability to generate sufficient funds for reinvestment in the business.
Question 1: If I assume that I will make no withdrawals from the business, would my after-tax
cash flows available for reinvestment be better if the business were operated as a sole proprietorship or as a regular (C) corporation?
Question 2: What are the tax consequences to me and the business if I operate as a sole proprietorship and withdraw $20,000 annually from the business? How much after-tax cash flow will remain for investment and how much will I have after-tax from the withdrawal?
Question 3: What are the tax consequences to me and the business if I operate as a C corporation and withdraw $20,000 in the form
of a dividend
? How much after-tax cash flow will remain for investment and how much will I have after-tax from the dividend? Would I better off to organize as an S Corporation? Why?