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Analyze a Startup
How would you select an organizational form for a business? Think about this question as you read the following scenario.
Joe Jones has created a business plan for a new product. He is not certain whether to organize his business as a regular corporation or a sole proprietorship. The following are his forecasted partial financial statements for the first four years of operation of the new venture named Uncle Joe's.
Forecasted partial Income Statement:
Year 1
Year 2
Year 3
Year 4
Sales
$15,000
$18,000
$23,400
$44,460
Cost of goods sold
8,000
10,000
15,000
21,000
Gross profit
7,000
8,400
23,460
Operating expenses
3,000
4,500
4,900
12,000
Interest
800
1,800
2,100
4,100
Earnings before taxes
2,200
2,700
2,800
7,900
Taxes
?
Net Income
Forecasted Balance Sheet:
Cash and inventories
$30,000
$45,000
$67,500
$101,250
Building and equipment
25,000
32,500
42,250
54,925
Total assets
55,000
77,500
109,750
156,175
Corporate Income Tax Schedule:
Taxable Income
Marginal Tax Rate
$1-30,000
10%
30,001-100,000
18
100,001-400,000
23
400,001-5,000,000
30
Over 5,000,000
40
Personal Income Tax Schedule:
$1-5,000
8%
5,001-20,000
12
20,001-60,000
19
60,001-180,000
25
Over 180,000
33
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