Question 1

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 2

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

Accepted Answer

Sole proprietorships are not treated as separate legal entities, meaning the business and owner are considered one and the same. The owner is personally responsible for all debts and liabilities of the business.

Question 3

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

Accepted Answer

By default, the IRS taxes unincorporated entities with more than one owner as partnerships. However, the entity can choose to be taxed as a corporation by filing Form 8832.

Question 4

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

Accepted Answer

Entities taxed as partnerships can use special allocations to allocate profits and losses to partners in a way that reflects their contributions, responsibilities, and individual needs. This allows for greater flexibility and incentivization within the partnership structure.

Question 5

A single-member LLC is taxed as a partnership.
Single-member LLCs are taxed as sole proprietorships.

Accepted Answer

Single-member LLCs are taxed as sole proprietorships by default. However, the owner can choose to have the LLC taxed as a corporation or S corporation instead.

Question 6

In certain circumstances, C corporations can elect to be treated as flow-through entities.
An S-Corporation election achieves this purpose.

Accepted Answer

C corporations can elect to be treated as flow-through entities by making an S-Corporation election, which allows the company's income, deductions, and credits to flow through to its shareholders for tax purposes. This avoids double taxation at both the corporate and individual levels.

Question 7

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

Accepted Answer

Unincorporated entities with only one individual owner, also known as "single-member LLCs" (limited liability companies), are not taxed as a separate entity. Instead, the owner reports the income and expenses of the business on their personal tax return as a sole proprietorship.

Question 8

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

Accepted Answer

Both tax and nontax objectives such as liability protection, flexibility, and ease of management should be taken into account when selecting a business entity.

Question 9

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

LLC members can customize their operating agreement to outline their distribution of profits and losses, management duties, decision-making processes, and more. This flexibility allows for greater control and customization over the legal arrangements within the company. Corporate shareholders, on the other hand, are generally subject to a standard set of rules and regulations dictated by the corporation's bylaws and state law.

Question 10

For tax purposes, only unincorporated entities can be considered to be disregarded entities.
If an entity is incorporated it is a corporate entity for tax purposes and cannot be a disregarded entity.

Accepted Answer

This statement is true. According to the IRS, only unincorporated entities such as sole proprietors and single-member LLCs can be considered disregarded entities for tax purposes. If an entity is incorporated, it is a separate legal and tax-paying entity and cannot be treated as a disregarded entity.

Question 11

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

Accepted Answer

Corporations are legally formed by filing articles of incorporation, not articles of organization, which are used for forming limited liability companies (LLCs).

Question 12

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

Accepted Answer

This means that the profits and losses of the entity flow through to the owners' individual tax returns, and the entity itself does not pay taxes on its own income.

Question 13

General partnerships are legally formed by filing a partnership agreement with the state in which the partnership will be formed.
General partnerships may be formed by written agreement among the partners, called a partnership agreement, or may be formed informally without a written agreement when two or more owners join together in an activity to generate profits.

Accepted Answer

General partnerships are typically formed by an agreement between partners and do not require filing with the state. They can be formed informally without a written agreement.

Question 14

S corporations have more restrictive ownership requirements than other entities.

Accepted Answer

S corporations are limited to having no more than 100 shareholders, all of whom must be individuals, certain trusts, or estates. They cannot have non-resident aliens or other entities as shareholders. This is a more restrictive ownership requirement than other entities, such as C corporations or LLCs.

Question 15

C corporations and S corporations are separate taxpaying entities that pay tax on their own income.
S corporations are flow-through entities whose income "flows through" to their owners who are responsible for paying tax on the income.

Accepted Answer

C corporations are separate taxpaying entities, but S corporations are not; S corporations' income flows through to shareholders who pay taxes on it.

Question 16

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 responsible for the corporation's debts because S corporations are considered separate legal entities, and their shareholders' liability is limited to the amount of their investment in the company. Additionally, S corporations are treated as flow-through entities for tax purposes, meaning that the corporation's income or loss is allocated to shareholders, who report it on their individual tax returns.

Question 17

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 required to file a certificate of limited partnership with the state in which the partnership is organized in order to be legally recognized as an entity.

Question 18

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

Accepted Answer

Sole proprietors are considered self-employed individuals and are responsible for paying self-employment taxes on their net income, which includes both the employer and employee portions of payroll taxes (Social Security and Medicare taxes).

Question 19

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

Accepted Answer

Corporations have the ability to issue shares of stock, which makes it easier to raise capital through a public offering. Additionally, the liability protection offered to shareholders of a corporation is more robust than the liability protection offered to members of an LLC or partnership, making it a safer option for investors.

Question 20

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

According to the Internal Revenue Code, 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.

Quiz 4: Entities Overview