Deck 12: Payroll Taxes

Question 1

In the Rebeli case, the owners were worried that their business could fail, and they could go bankrupt. Describe any two steps the owners tried to use in the first year to lower their personal risk.

Answer 1

No Answer

Question 2

Which of the following statements about social security taxes is correct?

A) People who work as independent contractors do not have to pay any social security taxes.
B) An employer must withhold some money for these taxes from each employee's pay, but there is no actual payroll tax expense for the employer.
C) An employer must pay a payroll tax, but there is no tax that is paid by the employees.
D) There is both a social security tax withheld from the employees' pay, and a related payroll tax paid by the employer.

Answer 2

D

Question 3

Based on IRS statistics, the most common type of business in the U.S. is

A) Proprietorship
B) Partnership
C) Regular C corporation
D) Subchapter S corporation

Answer 3

A

Question 4

Goodbiz Enterprises earns profits of $10 million during the year, and retains all of these profits. None are distributed to owners. Which of the following types of owners would not have to pay any taxes, on his or her individual tax returns, related to these undistributed earnings?

A) A shareholder in an LLC
B) A shareholder in a C corporation
C) A shareholder in an S corporation
D) A limited partner in a partnership

Question 5

In its first year, NewBiz enterprises loses money. Which type of owner would not be able to reduce his or her taxable income that year to reflect his or her share of the losses?

A) A limited partner in a limited partnership
B) A general partner in a limited partnership
C) A shareholder in a C corporation
D) A shareholder in a subchapter S corporation

Question 6

Which of the following types of business organizations is subject to "double taxation" of business income?

A) Limited Partnerships
B) Limited Liability Companies
C) C corporations
D) S corporations

Question 7

A primary disadvantage of the corporate form of business, compared to a general partnership, is

A) The indefinite life of the corporation, not tied to the lives of the owners
B) Greater difficulty in transferring ownership interests
C) Unlimited liability of shareholders for corporate liabilities
D) Double taxation of corporate profits

Question 8

An advantage of the corporate form of business over a general partnership is:

A) The business will last indefinitely, and its life is not tied to that of the owners.
B) Shareholders have unlimited liability for business debts.
C) Corporations are easier to form than partnerships.
D) Corporations avoid the "double taxation" that exists for partnership income.

Question 9

A disadvantage of a general partnership, compared to a regular corporation, is that:

A) There are more formalities and costs in establishing partnerships.
B) Partnership income is subject to double taxation.
C) Partners are subject to unlimited liability for debts of the business.
D) Partnerships must obtain charters from the state they are established in.

Question 10

One of the advantages of a partnership is:

A) Unlimited liability of partners for the debts of the partnership
B) Avoiding double taxation of business profits
C) The business has an indefinite life, not related to the lives of the partners.
D) It is easy for a partner to sell his or her interests without the permission of other owners.

Question 11

One of the normal rights of a shareholder in a corporation is to receive some information about the company.

Question 12

A person who wants to join a general partnership can "buy out" any of the current partners, and that person will become a full partner without any need to ask permission of the other general partners.

Question 13

Cheapo Corp. claims that the people who work for it are independent contractors, not employees. By classifying them this way, Cheapo is able to pay lower amounts for

A) Medicare taxes
B) social security taxes
C) Unemployment insurance taxes
D) All of the above

Question 14

Which of the following methods of financing increases the financial leverage of the business?

A) Sales of common stock by a C corporation
B) Sales of bonds by a C corporation
C) Sales of additional partnership interests by a general partnership
D) Reinvestment of income earned in the year by a general partnership

Question 15

Explain in general terms what the rules are for deciding if a person who does work for a company is an employee or an independent contractor.

Question 16

Explain why some companies may want to treat people who work for them as independent contractors, rather than as employees.

Question 17

Which of the following statements is true about preferred stock?

A) Preferred shareholder dividends must normally be paid before common shareholder dividends.
B) Preferred stock is always a better investment than common stock.
C) If a Board of Directors decides not to pay any dividends in a year, the preferred shareholders can have a court declare the company to be bankrupt.
D) Preferred shareholders always have better voting rights than common shareholders.

Question 18

Under the law, there is no upper limit to the number of shareholders of an S corporation.

Question 19

The law limits the number of maximum number of shareholders of an S corporation.

Question 20

"Commercial paper" is a form of company debt that usually has relatively short maturity periods.

Question 21

Debt financing is more risky than financing with equity.

Question 22

An advantage of financing using debt over equity financing is that interest is tax deductible.

Question 23

If someone works for the company as an independent contractor, the company has no obligation to report the amount paid to the IRS.

Question 24

The key consideration in deciding if someone is an independent contractor is whether the payer has the right to control or direct only the result of the work, but not what will be done and how it will be done.

Question 25

Legally, the key fact that separates "independent contractors" from "employees" is whether the people work at least 35 hours per week.

Question 26

If a company is able to consider someone providing services as a contractor, instead of an employee, the company can avoid paying social security and unemployment taxes related to that person.

Question 27

The law requires employers to both withhold social security taxes from employees' pay, and also to pay an employer portion of the social security tax.

Question 28

Companies must withhold social security taxes on payments to independent contractors.

Question 29

It is possible for a corporation to have different types of shares, with different voting rights.

Question 30

A shareholder in a corporation must receive permission from the company before selling his or her shares.

Question 31

Only very large, international companies have more than a single class of stock.

Question 32

One of the advantages of a proprietorship is that the business assets are legally separate from the owner's assets for all purposes.

Question 33

Both LLCs and Subchapter S companies are "pass-through" entities, whose owners have only "limited liability" for the business's obligations.

Question 34

The income of a "limited liability corporation" is treated for tax purposes similarly to partnership income, and is not subject to double taxation.

Question 35

Owners of LLCs have limited liability for the business's debts.

Question 36

The income of a Subchapter S corporation is subject to "double taxation," once as the income is earned by the corporation, and once as the earnings are distributed to shareholders.

Question 37

The partners of a partnership have only "limited liability" for partnership debts.

Question 38

The partners of a partnership have "unlimited liability" for partnership debts.

Question 39

An advantage of a partnership over a C corporation is that there is no "double taxation" of partnership income.

Question 40

There is double taxation of partnership income, once as the partnership earns it, and once as the money is distributed to the partners.

Question 41

To establish a partnership, the partners must first obtain a partnership charter from the state.

Question 42

Each partnership in a general partnership always shares equally with every other partner in the profits and losses of the business.

Question 43

One of the advantages of a partnership is it is easy to set up.

Question 44

One of the normal rights of a shareholder in a corporation is to share equally (on a per-share basis) in any dividends paid by a company.