Question 1

Unincorporated entities are typically treated as flow-through entities for tax purposes.

Accepted Answer

Unincorporated entities, such as sole proprietorships, partnerships, and limited liability companies (LLCs), are not separate legal entities from their owners. Therefore, they are typically treated as flow-through entities for tax purposes, which means that the entity's income or losses are passed through to the owners and reported on their personal tax returns.

Question 2

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

Accepted Answer

Limited partnerships are a formal legal structure that requires filing a certificate of limited partnership with the state in which the partnership will be organized.

Question 3

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

Accepted Answer

Corporations have the ability to issue and sell stocks to raise capital, which is necessary for going public. LLCs and general partnerships do not have this ability, as they are not recognized as separate legal entities from their owners. Additionally, corporations have more established governance structures and more established legal regulations that make them a more attractive option for going public.

Question 4

In certain circumstances,C corporation shareholders can elect to change the entity to a flow-through entity for tax purposes.

Accepted Answer

By filing Form 2553 with the IRS, C corporation shareholders can make an election to be taxed as an S corporation, which is a flow-through entity. However, there are certain eligibility requirements that must be met in order to make this election.

Question 5

A single-member LLC is taxed as a partnership.

Accepted Answer

A single-member LLC is taxed as a disregarded entity by default, meaning it is taxed as a sole proprietorship unless it elects to be taxed as a corporation.

Question 6

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

Accepted Answer

Sole proprietors are not considered separate legal entities from their businesses, so they are personally responsible for paying self-employment taxes on the profits they earn from their business.

Question 7

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

Accepted Answer

According to the default tax laws in the United States, an unincorporated entity with more than one owner is automatically considered a "pass-through" entity and taxed as a partnership. However, the owners have the option to elect to be taxed as a corporation instead.

Question 8

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

Accepted Answer

This is because LLCs have operating agreements, which can be customized to fit the unique needs of the business and its members. In comparison, corporations are required to have Articles of Incorporation and bylaws, which have more rigid requirements and provide less flexibility for customization.

Question 9

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

Accepted Answer

This is true. Special allocations can be used to distribute profits and losses in a way that reflects the individual contributions and responsibilities of each partner. This can be especially useful in partnerships where there is a significant imbalance of investment or effort among the partners.

Question 10

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

Accepted Answer

Unincorporated entities with only one individual owner are classified as sole proprietorships for tax purposes. The income and expenses of the business are reported on the owner's personal tax return (Form 1040) using Schedule C, and the owner pays self-employment tax on any net income from the business.

Question 11

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

Accepted Answer

Tax rules and legal classification can differ; entities might be classified differently for tax purposes than they are for legal purposes. For example, a business entity that is legally formed as a corporation can choose to be taxed as a partnership or sole proprietorship if it meets certain criteria.

Question 12

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

Accepted Answer

Sole proprietorships are not considered separate legal entities from their individual owners, which means that the owner is personally responsible for all aspects of the business, including debts and legal liabilities.

Question 13

Both tax and nontax objectives should be considered when choosing the entity type for a new business.

Accepted Answer

Tax objectives such as minimizing taxes paid and non-tax objectives such as ease of management, liability protection, and raising capital should be balanced when choosing the entity type for a new business.

Question 14

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

Accepted Answer

This is known as the "dividend equivalence" rule and is outlined in section 301 of the Internal Revenue Code. If a C corporation distributes property to its shareholders, they will recognize dividend income equal to the fair market value of the property, unless the distributing corporation can demonstrate that the distribution was made out of its own after-tax earnings and profits.

Question 15

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

Accepted Answer

General partnerships do not require formal registration with the state. A partnership agreement may be filed but it is not a legal requirement.

Question 16

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

Accepted Answer

C corporations are separate taxpaying entities that pay tax on their own income, while S corporations are pass-through entities, meaning the income, deductions, and credits pass through to the shareholders' individual tax returns.

Question 17

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

Accepted Answer

This is true. Disregarded entities are entities that are not separate from their owners for tax purposes. Only unincorporated entities such as sole proprietorships, partnerships, and limited liability companies (LLCs) with a single owner can be considered disregarded entities for tax purposes.

Question 18

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

Accepted Answer

S corporation shareholders are not personally liable for the corporation's debts because the corporation is a separate legal entity from its shareholders. However, shareholders of an S corporation are still responsible for paying taxes on their share of the corporation's profits, as the corporation's income is passed through to the individual shareholders for tax purposes.

Question 19

S corporations have more restrictive ownership requirements than other entities.

Accepted Answer

S corporations are limited to having 100 shareholders, who must be US citizens or residents, and can only issue one class of stock. Other entities, such as C corporations and LLCs, do not have these ownership restrictions.

Question 20

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

Accepted Answer

Corporations are legally formed by filing articles of incorporation with the state, not articles of organization.

Quiz 15: Entities Overview