Conducting their business as a C corporation, an S corporation, or an LLC would meet Bill and George's objectives of having limited liability. From a tax perspective, both the S corporations and the LLC would allow the losses in the early years to be passed through to the owners. This cannot be achieved with a C corporation, which would be required to carry over the losses to future years in which the company is profitable. Once the entity starts earning money, the tax consequence are as follows:

As a C corporation, the entity would pay income tax of $61,250 on taxable earnings of $200,000. If the remaining after-tax earnings of $138,750 are distributed equally to Bill and George (each owner would receive a taxable dividend of $69,375), each shareholder pays an additional income tax of $10,406 ($69,375 X 15%). The combined entity/owner tax liability is $82,062, resulting in after-tax cash flow of $117,938.

If the entity is operated as an S corporation or an LLC, no tax is paid at the entity level. However, the entire $200,000 is taxed as ordinary income at the owner level, resulting in each owner paying $28,000 ($100,000 X 28%) income tax. The combined entity/owner tax liability is $56,000 resulting in after-tax cash flows of $144,000

Evaluate and discuss the comparative forms of doing business and discuss the pros and cons of each, explaining your rationale in detail. Which form would you use? Why?