Plum Corporation will begin operations on January 1. Earnings for the next five years are projected to be relatively stable at about $80,000 per year. The shareholders of Plum are in the 32% income tax bracket.Assume that Plum will reinvest its after-tax earnings in the growth of the company. Should Plum operate as a C corporation or as an S corporation?Assume that Plum will distribute its after-tax earnings each year to its shareholders. Should Plum operate as a C corporation or as an S corporation?

Entity perspective of legal organization Business form include sole proprietorship, partnership, LLC and Corporation. All of the business form are artificial except for sole proprietorship. The conduit perspective states that the business is same as its owners and entity perspective include that business and owners are separate legal entity. Corporation follows entity perspective as it is different from its shareholders and shareholders are not personally liable for act conducted by corporation. Sole proprietorship and partnership follows conduit perspective where owners are liable for all the action undertaken by entity. Limited liability Corporation is mix of conduit and entity perspective. S Corporation earned special tax status where they are taxed similar to partnership or Limited Liability Corporation (LLCs). C Corporation are Standard Corporation where the tax is paid by entity rather than shareholders on earnings earned by corporation. In situation (a) where the after tax earnings would be reinvested in growth of company, it is preferable to set up C Corporation. C Corporation would have additional benefit in relation to number of shareholders and the equity financing can be raised easily. In situation (b) where the after tax earnings are distributed to shareholders, it is preferable to set up S Corporation. S Corporation would help to avoid double taxation which is one of the disadvantages of C Corporation. With S Corporation the earnings would be taxable only once that is in the hands of the owners.

Answered: Plum Corporation will begin operations…

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Plum Corporation will begin operations on January 1. Earnings for the next five years are projected to be relatively stable at about $80,000 per year. The shareholders of Plum are in the 32% income tax bracket.

Assume that Plum will reinvest its after-tax earnings in the growth of the company. Should Plum operate as a C corporation or as an S corporation?
Assume that Plum will distribute its after-tax earnings each year to its shareholders. Should Plum operate as a C corporation or as an S corporation?

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