Deck 15: Entities Overview

Question 1

General partnerships are legally formed by filing a partnership agreement with the statein which the partnership will be formed.

Answer 1

False

Question 2

Corporations are legally better suited for taking a business public compared with LLCsand general partnerships.

Answer 2

True

Question 3

S corporation shareholders are legally responsible for paying the S corporation's debtsbecause S corporations are treated as flow-through entities for tax purposes.

Answer 3

False

Question 4

Sole proprietors are subject to self-employment taxes on net income from their sole proprietorships.

Question 5

Entities taxed as partnerships can use special allocations to reward owners based on their responsibilities, contributions, and individual needs.

Question 6

Shareholders of C corporations receiving property distributions must recognize dividend income equal to the fair market value of the distributed property if the distributingcorporation has sufficient earnings and profits.

Question 7

For tax purposes, only unincorporated entities can be considered to be disregarded entities.

Question 8

In certain circumstances, C corporations can elect to be treated as flow-through entities.

Question 9

Tax rules require that entities be classified the same way for tax purposes as they areclassified for legal purposes.

Question 10

Limited partnerships are legally formed by filing a certificate of limited partnership withthe state in which the partnership will be organized.

Question 11

C corporations and S corporations are separate taxpaying entities that pay tax on their own income.

Question 12

Unincorporated entities with only one individual owner are taxed as sole proprietorships.

Question 13

An unincorporated entity with more than one owner is, by default, taxed as a partnership.

Question 14

Corporations are legally formed by filing articles of organization with the state in whichthe corporation will be created.

Question 15

All unincorporated entities are generally treated as flow-through entities for tax purposes.

Question 16

LLC members have more flexibility than corporate shareholders to alter their legalarrangements with respect to one another, the entity, and with outsiders.

Question 17

Both tax and nontax objectives should be considered when choosing an appropriatebusiness entity.

Question 18

A single-member LLC is taxed as a partnership.

Question 19

S corporations have more restrictive ownership requirements than other entities.

Question 20

Sole proprietorships are not treated as legal entities separate from their individualowners.

Question 21

If individual taxpayers are the shareholders of PST Corporation and PST corporation is a shareholder of MNO Corporation, how many levels of tax is MNO's pre-tax incomepotentially exposed to?

A) Triple taxation.
B) Single taxation.
C) No taxation.
D) Double taxation.

Question 22

Which legal entity provides the least flexible legal arrangement for owners?

A) Partnership.
B) Corporation.
C) Sole Proprietorship.
D) LLC.

Question 23

Which legal entity is generally best suited for going public?

A) Limited Liability Partnership.
B) LLC.
C) General Partnership.
D) Corporation.
E) All of these entities are equally suited for going public.

Question 24

If C corporations retain their after-tax earnings, when will their shareholders be taxed on the retained earnings?

A) Shareholders will be taxed on undistributed retained earnings in the year the corporation files its tax return.
B) Shareholders will be taxed in the year they elect to be taxed on undistributed retained earnings.
C) Shareholders will be taxed when they sell their shares at a gain.
D) None of the choices are correct.

Question 25

Which legal entity is correctly paired with the party that bears the ultimate responsibility for paying the legal entity's liabilities?

A) LLC - LLC members.
B) General Partnership - Partnership.
C) Corporation - Corporation and Limited Partnership - General partner.
D) Limited Partnership - General partner.
E) Corporation - Corporation.

Question 26

Which of the following is most effective in mitigating the double tax?

A) Shift income from high tax rate corporations to low tax rate shareholders.
B) Shift income from high tax rate shareholders to low tax rate corporations.
C) Shift income from low tax rate corporations to high tax rate shareholders.
D) Shift income from low tax rate shareholders to high tax rate corporations.

Question 27

Crocker and Company, Inc. had taxable income of $550,000. At the end of the year, it distributes all its after-tax earnings to Jimmy, the company's sole shareholder. Jimmy's marginal ordinary tax rate is 34 percent and his marginal tax rate on dividends is 15 percent. What is the overall tax rate on Crocker and Company's pre-tax income?

A) 43.9%.
B) 15.0%.
C) 9.9%.
D) 66.7%.
E) 35.0%.

Question 28

What document must LLCs file with the state to organize their business?

A) Certificate of LLC.
B) Articles of incorporation.
C) Partnership agreement.
D) Articles of organization.
E) None of the choices are correct. LLCs do not have to file with the state to organize their business.

Question 29

Which of the following entity characteristics are generally key drivers for small business owners in deciding which entity to choose?

A) Required accounting period.
B) Double taxation and required accounting period.
C) Double taxation.
D) Liability protection.
E) Double taxation and liability protection.

Question 30

Generally, which of the following flow-through entities can elect to be treated as a Ccorporation?

A) General partnership.
B) Limited partnership.
C) Limited Liability Company.
D) All of the choices are correct.

Question 31

On which tax form does a single member LLC with one individual owner report its income and losses?

A) Form 1065.
B) Form 1120.
C) Form 1040, Schedule C.
D) Form 1120S.

Question 32

On which tax form do LLCs with more than one owner generally report their income and losses?

A) Form 1120.
B) Form 1040, Schedule C.
C) Form 1065.
D) Form 1120S.

Question 33

If an individual forms a sole proprietorship, which nontax factor will be of greatest benefit to the sole proprietor?

A) Legal flexibility in defining rights and responsibilities of owners.
B) Facilitates initial public offerings.
C) Minimal time and cost to organize.
D) Liability protection.

Question 34

Which of the following is not an effective strategy for mitigating double taxation in a Ccorporation?

A) C corporations can make an S election.
B) C corporations can pay dividends to their shareholders.
C) C corporations can shift income to shareholders via deductible payments.
D) None of the choices are correct. All of the choices are effective strategies to mitigate or avoid double taxation.

Question 35

Which of the following legal entities file documents with the state to be formally recognized by the state?

A) Limited Liability Company.
B) Sole Proprietorship.
C) General Partnership.
D) None of the choices are correct.

Question 36

Logan, a 50 percent shareholder in Military Gear Inc., is comparing the tax consequences of losses from C corporations with losses from S corporations. Assume Military Gear Inc has a $100,000 loss for the year, Logan's tax basis in his Military Gear Inc. stock was$150,000 at the beginning of the year, and he received $75,000 ordinary income from other sources during the year. Assuming Logan's marginal regular income tax rate is15%, how much more tax will Logan pay currently if Military Gear Inc. is a Ccorporation compared to the tax he would pay if it were an S corporation?

A) $11,250.
B) $0.
C) $3,750.
D) $7,500.

Question 37

On which form is income from a single member LLC with one corporate (C corporation)owner reported?

A) Form 1120 used by C corporations to report their income.
B) Form 1120S used by S corporations to report their income.
C) Form 1040, Schedule C used by sole proprietorships to report their income.
D) Form 1065 used by partnerships to report their income.
E) None of the choices are correct.

Question 38

While a C corporation's losses cannot be used by their shareholders to offset personal income, a C corporation may carry back and carry forward losses to help offset thetaxable income a corporation had or will have. How are these net operating losses carried back and carried forward?

A) Carried back two years, carried forward five years.
B) Carried back indefinitely, carried forward two years.
C) Carried back two years, carried forward twenty years.
D) Carried back two years, carried forward indefinitely.
E) None of the choices are correct.

Question 39

Losses from C corporations are never available to offset a shareholder's personal income.

Question 40

Which of the following legal entities are generally classified as C corporations for tax purposes?

A) Sole proprietorship.
B) S corporations.
C) Limited Liability Company.
D) Limited partnerships.
E) None of the choices are correct.

Question 41

From a tax perspective, which entity choice is preferred when a liquidating distribution occurs and the entity has assets that have declined in value?

A) S corporation and LLC.
B) LLC.
C) Partnership and S corporation.
D) Partnership.
E) S corporation.

Question 42

Roberto and Reagan are both 25 percent owner/managers for Bright Light Enterprises.Roberto runs the retail store in Sacramento, CA, and Reagan runs the retail store in SanFrancisco, CA. Bright Light generated a $125,000 profit companywide made up of a$75,000 profit from the Sacramento store, a ($25,000) loss from the San Francisco store, and a combined $75,000 profit from the remaining stores. If Bright Light is taxed as a partnership and decides that Roberto and Reagan will be allocated 70 percent of his own store's profit with the remaining profits allocated pro rata among all the owners, how much income will be allocated to Reagan?

A) $5,000.
B) ($17,500).
C) $20,000.
D) ($25,000).

Question 43

What tax year-end must an unincorporated entity with only one owner adopt?

A) The entity may adopt any year-end except for a calendar year-end.
B) The entity must adopt a calendar year-end.
C) The entity must adopt the same year-end as its owner.
D) The entity is free to adopt any tax year-end.

Question 44

Roberto and Reagan are both 25 percent owner/managers for Bright Light Inc. Roberto runs the retail store in Sacramento, CA, and Reagan runs the retail store in SanFrancisco, CA. Bright Light Inc. generated a $125,000 profit companywide made up of a$75,000 profit from the Sacramento store, a ($25,000) loss from the San Francisco store, and a combined $75,000 profit from the remaining stores. If Bright Light Inc. is an Scorporation, how much income will be allocated to Roberto?

A) $125,000.
B) $31,250.
C) $75,000.
D) $62,500.

Question 45

Emmy would like to organize PRK as either an LLC or as a corporation (taxed as a C corporation) generating a 15 percent annual before-tax rate of return on a $100,000 investment. Individual ordinary rates are 25 percent, corporate rates are 15 percent, and individual capital gains anddividends tax rates are 5 percent. PRK will distribute its earnings annually to either its members or shareholders.a. Ignoring self-employment taxes, how much would Emmy keep after taxes if PRK is organized as either anLLC or as a corporation (taxed as a C corporation)?b. Ignoring self-employment taxes, what are the overall tax rates (combined entity and owner level) if PRK is organized as either an LLC or a corporation (taxed as a C corporation)?

Question 46

Taylor would like to organize DRK as either an LLC or as a corporation (taxed as a C corporation) generating a 13 percent annual before-tax rate of return on a $250,000 investment. Individual and corporate tax rates are both 30 percent and individual capital gains and dividends tax rates are 5 percent. DRK will distribute its earnings annually to either its members or shareholders.a. Ignoring self-employment taxes, how much would Taylor keep after taxes if DRK is organized as either anLLC or as a corporation (taxed as a C corporation)?b. Ignoring self-employment taxes, what are the overall (combined owner and entity level) tax rates if DRK is organized as either an LLC or as a corporation (taxed as a C corporation)?

Question 47

David would like to organize HOS as either an LLC or as a corporation (taxed as a C corporation) generating a 12 percent annual before-tax return on a $300,000 investment. Individual and corporate tax rates are both 30 percent and individual capital gains and dividend tax rates are 15 percent. HOS will pay out its after-tax earnings every year to either its members or its shareholders.a. Ignoring self-employment taxes, how much would David keep after taxes if HOS is organized as either anLLC or a corporation (taxed as a C corporation)?b. Ignoring self-employment taxes, what are the overall tax rates (combined owner and entity level) if HOS is organized as either an LLC or a corporation (taxed as a C corporation)?

Question 48

If you were seeking an entity with the most favorable tax treatment regarding (1) the number of owners allowed, (2) the flexibility to select your accounting period, and (3) the availability of preferential capital gains rates when selling your ownership interest, which entity should you decide to use?

A) C corporation.
B) Sole proprietorship.
C) Partnership.
D) S corporation.

Question 49

What is the tax impact to a C corporation or an S corporation when it makes a property distribution to a shareholder?

A) Recognizes loss only.
B) Recognizes gain but not loss.
C) Recognizes either gain or loss.
D) Does not recognize gain or loss.

Question 50

When an employee/shareholder receives an income allocation from an S corporation, what taxes apply to the income allocation?

A) FICA and self-employment tax.
B) Self-employment tax only.
C) FICA tax only.
D) None of the choices are correct. This income will never be taxed.
E) None of the choices are correct. This income will, however, be subject to regular income tax.

Question 51

Jaron would like to organize TMZ as either an LLC or as a corporation (taxed as a C corporation) generating a 6 percent annual before-tax rate of return on a $200,000 investment. Individual and corporate tax rates are both 40 percent and individual capital gains and dividends tax rates are 10 percent. TMZ will distribute its earnings annually to either its members or shareholders.a. Ignoring self-employment taxes (and the additional Medicare Tax), how much would Jaron keep after taxes if TMZ is organized as either an LLC or a corporation (taxed as a C corporation)?b. Ignoring self-employment taxes (and the additional Medicare Tax), what are the overall tax rates (combined overall and entity level) if TMZ is organized as either an LLC or as a corporation (taxed as a C corporation)?

Question 52

SNL corporation, a C corporation, reports $400,000 of taxable income in the current year. SNL's tax rate is 35 percent. Answer the following questions, assuming Keegan, SNL's sole shareholder, has a marginal tax rate of39.6 percent on ordinary income and 23.8 percent on dividend income (including the net investment income tax).a. Compute the first level of tax on SNL's taxable income for the year.b. Compute the second level of tax on SNL's income assuming that SNL currently distributes all of itsafter-tax earnings to Keegan. What is the overall (combined owner and entity level) tax rate on SNL's taxable income for the year?

Question 53

From a tax perspective, which entity choice is preferred when a liquidating distribution occurs and the entity has appreciated assets?

A) S corporation and C corporation.
B) C corporation.
C) Partnership.
D) S corporation.

Question 54

Robert is seeking additional capital to expand ABC Inc. In order to qualify ABC as an Scorporation, which type of investor group could Robert obtain capital from?

A) 30 different partnerships.
B) 90 nonresident individuals.
C) 10 different C corporations.
D) 120 unrelated resident individuals.
E) None of the choices are correct.

Question 55

Which of the following is not an effective strategy for mitigating the double tax associated with C corporations?

A) Borrowing money from a shareholder.
B) Paying a salary to a shareholder-employee.
C) Paying fringe benefits to a shareholder-employee.
D) Leasing property from a shareholder.
E) All of the choices are effective strategies for mitigating double taxation.

Question 56

What is the maximum number of unrelated shareholders a C corporation can have, the maximum number of unrelated shareholders an S corporation can have, and the maximum number of partners a partnership may have respectively?

A) no limit; 100; 2.
B) no limit; 100; no limit.
C) 100; 100; no limit.
D) 100; no limit; no limit.

Question 57

In the current year, DNS (a C corporation) had taxable income of $600,000 and distributed all of its after-tax earnings to Daniel, its sole shareholder. DNS's tax rate is 38 percent. Assuming Daniels' marginal tax rate on ordinary income is 28 percent and his dividend rate is 15 percent (he is notsubject to the net investment income tax), what is the overall tax rate (combined corporate level and shareholder level) on DNS's $600,000 of taxable income?

Question 58

Jerry would like to organize FBC as either an LLC or as a corporation (taxed as a C corporation) generating an 8 percent annual before-tax rate of return on a $400,000 investment. Individual and corporate tax rates are both 35 percent and individual capital gains and dividends tax rates are 15 percent. FBC will pay out its after-tax earnings every year to either its members or its shareholders.a. Ignoring self-employment taxes, how much would Jerry keep after taxes if FBC is organized as either anLLC or as a corporation (taxed as a C corporation)?b. Ignoring self-employment taxes, what are the overall tax rates (combined owner and entity level) tax rates if FBC is organized as either an LLC or as a corporation (taxed as a C corporation)?

Question 59

Becca would like to organize BMI as either an LLC or as a corporation (taxed as a C corporation) generating a 4 percent annual before-tax rate of return on a $450,000 investment. Individual ordinary rates are 28 percent, corporate rates are 15 percent, and individual capital gains anddividends tax rates are 15 percent. BMI will distribute its earnings annually to either its members or shareholders.a. Ignoring self-employment taxes, how much would Becca keep after taxes if BMI is organized as either aLLC or as a corporation (taxed as a C corporation)?b. Ignoring self-employment taxes, what are the overall (combined owner and entity level) tax rates if BMI is organized as either an LLC or as a corporation (taxed as a C corporation)?

Question 60

Assume you plan to start a new enterprise; you know the probability of having losses for the first three years of operations is almost 90 percent, and you know you will report a substantial amount of income from other sources during those same three years. From a tax perspective, which of the following entity choices would be least favorable?

A) General partnership.
B) S corporation.
C) LLC.
D) C corporation.

Question 61

For the current year, Creative Designs Inc., a C corporation, reports taxable income of $300,000 before paying salary to Ben the sole shareholder of Creative Designs Inc. (CD). Ben's marginal tax rate on ordinary incomeis 28 percent and 15 percent on dividend income. Assume CD's tax rate is 39 percent.a. How much total income tax will Creative Designs and Ben pay on the $300,000 taxable income for the year if CD doesn't pay any salary to Ben and instead distributes all of its after-tax income to Ben as a dividend?b. How much total income tax will Creative Designs and Ben pay on the $300,000 of income if CD pays Ben asalary of $100,000 and distributes its remaining after-tax earnings to Ben as a dividend?c. Compare your answer in part a. with your answer to part b. Explain why these numbers are different.

Question 62

In its first year of existence, BYC Corporation (a C corporation) reported a loss for tax purposes of($40,000). How much tax will BYC pay in year 2 if it reports taxable income from operations of$35,000 in year 2 before any loss carryovers?

Question 63

Jamal Corporation, a C corporation, projects that it will have taxable income of $500,000 before incurring any lease expenses. Jamal's tax rate is 34 percent. Ali, Jamal's sole shareholder, has a marginal tax rate of 33percent on ordinary income and 15 percent on dividend income. Jamal always distributes all of its after-tax earnings to Ali.a. What is the amount of the combined corporate and shareholder level tax on Jamal Corp.'s $500,000 pre-lease expense income if Jamal Corp. distributes all of its after-tax earnings to its sole shareholder Ali (ignore the 3.8% net investment income tax)?b. What is the amount of the combined corporate and shareholder level tax on Jamal Corp.'s $500,000pre-lease expense income if Jamal leases equipment from Ali at a cost of $120,000 for the year (ignore the3.8% net investment income tax)?c. What is the amount of the combined corporate and shareholder level tax on Jamal Corp.'s $500,000pre-lease expense income if Jamal Corp. leases equipment from Ali at a cost of $120,000 for the year but theIRS determines that the fair market value of the lease payments is $80,000 (ignore the 3.8% net investment income tax)?

Question 64

Corporation A owns 10% of Corporation C. The marginal tax rate on non-dividend income for both A and C is 34%. Corporation C earns a total of $200 million before taxes in the current year, pays corporate tax on this income and distributes the remainder proportionately to its shareholders as adividend. In addition, Corporation A owns 20% of partnership P that earns $500 million in the currentyear. Given this fact pattern, answer the following questions:a. How much cash from the Corporation C dividend remains after Corporation A pays the tax on the dividend assuming Corporation A is eligible for the 70 percent dividends received deduction?b. If partnership P distributes all of its current year earnings in proportion to the partner's ownership percentages, how much cash from Partnership P does Corporation A have after paying taxes on its share of income from the partnership?c. If you were to replace corporation A with individual A [her marginal tax rate on ordinary income is 28% and on qualified dividends is 15% (the net investment income tax does not apply)] in the original factpattern above, how much cash does individual A have from the Corporation C dividend after alltaxes assuming the dividends are qualified dividends? Consistent with the original facts, assume thatCorporation C distributes all of its after-tax income to its shareholders.

Question 65

Cali Corp. (a C corporation) projects that it will have taxable income of $250,000 for the year before paying any fringe benefits. Stacey, Cali's sole shareholder, has a marginal tax rate of 33 percent on ordinary income and 15 percent on dividend income. Assume Cali's tax rate is 34 percent.a. What is the amount of the combined corporate and shareholder level income tax on Cali's $250,000 ofpre-benefit income if Cali Corp. does not pay out any fringe benefits and distributes all of its after-tax earnings to Stacey?b. What is the amount of the combined corporate and shareholder level income tax on Cali's $250,000 ofpre-benefit income if Cali Corp. pays Stacey's adoption expenses of $50,000 and the payment is considered to be a qualified fringe benefit? Cali Corp. distributes all of its after-tax earnings to Stacey.c. What is the amount of the combined corporate and shareholder level income tax on Cali's $250,000 ofpre-benefit income if Cali Corp. pays Stacey's adoption expenses of $50,000 and the payment is considered to be a nonqualified fringe benefit? Cali Corp. distributes all of its after-tax earnings to Stacey.

Question 66

In its first year of existence Aspen Corp. (a C corporation) reported a loss for tax purposes of$50,000. In year 2, it reports a $30,000 loss. For year 3, it reports taxable income from operations of$120,000. How much tax will Aspen Corp. pay for year 3? Consult the corporate tax rate table provided to calculate your answer. (Use Corporate Tax Rate Schedule.)

Question 67

For the current year, Birch Corporation, a C corporation, reports taxable income of $400,000 before paying salary to its sole shareholder Elaine. Elaine's marginal tax rate on ordinary income is 33percent and 15 percent on dividend income. If Birch pays Elaine a salary of $200,000 but the IRS determines that Elaine's salary in excess of $100,000 is unreasonable compensation, what is the overall income tax rate on Birch's $400,000 pre-salary income? Assume Birch's tax rate is 35percent and it always distributes all after-tax earnings to Elaine.

Question 68

Nancy purchased a building and then leased the building to ZML. Nancy is the sole shareholder of ZML. She leased the building to ZML for $2,500 per month. However, the IRS determined that the fair market value of the lease payment should only be $1,500 per month. How would the leasepayment be treated with respect to both Nancy and ZML?

Question 69

Rodger owns 100% of the shares in Trevor Inc., a C corporation. Assume the following for the current year:Trevor Inc.'s pre-tax income = $16,000Trevor Inc.'s marginal tax rate = 35%Percentage of after-tax earnings retained by Trevor Inc. = 0% (i.e. all after-tax earnings distributed)Rodger's dividend tax rate = 5%Given these assumptions, how much cash does Rodger have from the dividend after all taxes have been paid?

Question 70

Tuttle Corporation (a C corporation) projects that it will have taxable income for the year of $300,000 before incurring any interest expense. Assume Tuttle's tax rate is 35 percent.a. What is the amount of the combined corporate and shareholder level tax on the $300,000 of pre-interest expense earnings if Ruth, Tuttle's sole shareholder, lends Tuttle Corporation $100,000 at the beginning of the year, Tuttle pays Ruth $10,000 of interest on the loan (interest is considered to be reasonable), and Tuttle distributes all of its after-tax earnings to Ruth? Assume her ordinary marginal rate is 33 percent and dividend tax rate is 15 percent.b. Assume the same facts as in part a except that the IRS determines that the fair market value of the interest should be $8,000. What is the amount of the combined corporate and shareholder level tax on Tuttle Corporation's pre-interest expense earnings?