Amber Company Has $100,000 in Net Income in the Current

Essay

Amber Company has $100,000 in net income in the current year before deducting any compensation or other payment to its sole owner, Alfredo. Assume that Alfredo is in the 33% marginal tax bracket. Discuss the tax aspects of each of the following independent arrangements. (Assume that any salaries are reasonable in amount and ignore any employment tax considerations.)
a. Alfredo operates Amber Company as a proprietorship.
b. Alfredo incorporates Amber Company and pays himself no salary and no dividend.
c. Alfredo incorporates Amber Company and pays himself a $50,000 salary and a dividend of $42,500 ($50,000 - $7,500 corporate income tax).