Question 1

_____ 18. An S corporation shareholder can only deduct losses of the S corporation to the extent he or she has positive stock basis.

Accepted Answer

False

Question 2

_____ 5. A limited partnership must have a general partner.

Accepted Answer

A limited partnership consists of one or more general partners who manage the partnership and are personally liable for its debts, as well as one or more limited partners who contribute capital but have no management authority or personal liability beyond their investment.

Question 3

_____ 15. The income from a general partnership is passive income to all partners..

Accepted Answer

The income from a general partnership is not passive income. It is considered active income and each partner is responsible for paying taxes on their share of the income.

Question 4

_____ 6. Partners pay taxes on their share of all the partnership net income annually.

Accepted Answer

Partners are required to pay taxes on their share of the partnership's net income every year, regardless of whether the income is distributed or not.

Question 5

_____ 7. The limited liability partnership form of business offers partners protection from all partnership debts.

Accepted Answer

The limited liability partnership form of business offers partners protection from most partnership debts, but not all. In some cases, partners may still be personally responsible for certain types of debts, such as those incurred through their own negligence or misconduct.

Question 6

_____ 19. The AAA of the S corporation is a corporate-level account.

Accepted Answer

The accumulated adjustments account (AAA) of an S corporation is a corporate-level account that tracks the accumulated net income and losses of the corporation since the date it elected to become an S corporation.

Question 7

. The entity concept of a partnership views the partnership as separate from the partners and permits certain transactions between the partner and the partnership.

Accepted Answer

The entity concept of a partnership considers the partnership as a separate legal entity from the partners, allowing for certain transactions between the partners and the partnership.

Question 8

_____ 8. The owners of a limited liability company are called members.

Accepted Answer

This is correct. The owners of a limited liability company (LLC) are called members.

Question 9

_____ 3. A sole proprietor is considered a self-employed individual.

Accepted Answer

A sole proprietor is a business owned and operated by one person, who is considered self-employed.

Question 10

_____ 10. A limited liability company that has only one member must be taxed as a sole proprietorship.

Accepted Answer

Although a single-member LLC is taxed like a sole proprietorship by default, it has the option to be taxed as a corporation or an S corporation.

Question 11

_____ 9. Limited liability companies are generally taxed as partnerships unless the company elects to be taxed as a corporation.

Accepted Answer

Limited liability companies (LLCs) are considered pass-through entities, which means that the profits and losses are passed through to the members and reported on their individual tax returns. By default, LLCs are taxed as partnerships. However, LLCs can elect to be taxed as a corporation if they choose to do so.

Question 12

_____ 20. S corporations never pay any income taxes.

Accepted Answer

While S corporations do not pay federal income taxes, their shareholders must report their share of the corporation's income on their personal tax returns and pay taxes on that income.

Question 13

_____ 1. A flow-through entity aggregates all its income and subtracts all expense items for reporting its net income.

Accepted Answer

The answer of _____ 1. A flow-through entity aggregates all...

Question 14

_____ 12. Once established at entry, a partner's basis account does not change.

Accepted Answer

A partner's basis account can change over time due to various transactions such as distributions, contributions, and allocations of income or losses.

Question 15

_____ 4. A general partner in a limited partnership is not protected from the partnership's liabilities.

Accepted Answer

General partners in a limited partnership have unlimited personal liability for the partnership's debts and obligations.

Question 16

_____ 17. Only 50 percent or more of the shareholders of an S corporation must consent to the S election.

Accepted Answer

For an S corporation election to be valid, all shareholders must consent to the election.

Question 17

____ 13. Recourse debts can only be satisfied with the property used as collateral.

Accepted Answer

Recourse debts allow lenders to pursue the borrower's other assets beyond the collateral if the collateral does not fully satisfy the debt.

Question 18

_____ 2. A sole proprietorship must use the cash method of accounting.

Accepted Answer

A sole proprietorship may use either the cash method or the accrual method of accounting.

Question 19

_____ 16. A loss is never recognized on a nonliquidating distribution from a partnership.

Accepted Answer

A loss is not recognized on a nonliquidating distribution from a partnership.

Question 20

____ 14. The basis limitation rules are applied before the at-risk and passive loss limitation rules.

Accepted Answer

The basis limitation rules are applied before the at-risk and passive loss limitation rules. This is because the basis limitation determines how much loss can be deducted, while the at-risk and passive loss limitation rules determine whether or not the loss is deductible.

Quiz 11: Sole Proprietorships and Flow-Through Entities