Question 1

What document must an LLC file with the state to organize its business?
A)Articles of incorporation.
B)Certificate of LLC.
C)Articles or a certificate of organization.
D)Partnership agreement.
E)None of the choices are correct.An LLC does not have to file with the state to organize its business.

Accepted Answer

An LLC must file either Articles of Organization or a Certificate of Organization with the state to legally organize its business. Articles of incorporation are generally used for corporations, while a partnership agreement is used for partnerships. Option E is incorrect as an LLC is required to file something with the state to be recognized as a legal entity.

Question 2

Which legal entity is generally best suited for going public?
A)Corporation.
B)LLC.
C)Limited liability partnership.
D)General partnership.
E)All of these entities are equally suited for going public.

Accepted Answer

A corporation is generally best suited for going public because it offers limited liability protection to its shareholders and can issue various types of stock, including common stock and preferred stock, to raise capital. Additionally, a corporation has a separate legal identity from its owners, enabling it to attract a wider range of investors and to be more easily bought and sold in the public markets. LLCs and partnerships, on the other hand, do not have shares of stock and may have less liquidity and less access to capital in the public markets.

Question 3

If a C corporation incurred a net operating loss in 2017, it could carry the loss back two years and forward 20 years to offset income in those years.However, it may offset only 80 percent of the taxable income before the NOL deduction in those years.

Accepted Answer

Prior to the Tax Cuts and Jobs Act (TCJA) of 2017, C corporations could carry back net operating losses (NOLs) two years and forward 20 years to offset 100% of taxable income. The TCJA changed the rules, eliminating carrybacks for losses arising in tax years ending after December 31, 2017, and allowing indefinite carryforwards, but limiting the deduction to 80% of taxable income for losses arising in tax years beginning after December 31, 2017.

Question 4

If a C corporation incurs a net operating loss in 2019 and carries the loss forward to 2020, the NOL carryover is not allowed to offset 100 percent of the corporation's taxable income (before the net operating loss deduction).

Accepted Answer

Under the Tax Cuts and Jobs Act, for losses arising in tax years beginning after December 31, 2017, the NOL deduction is limited to 80% of taxable income for carryforwards.

Question 5

The C corporation tax rate is significantly lower than the top individual marginal tax rate.

Accepted Answer

The C corporation tax rate is currently at a flat rate of 21%, while the top individual marginal tax rate is currently 37%. Therefore, the C corporation tax rate is significantly lower than the top individual marginal tax rate.

Question 6

An S corporation shareholder who is not a passive investor is allowed to deduct a business loss allocation from the S corporation to the extent of the shareholder's basis in the stock no matter how large the loss.

Accepted Answer

An S corporation shareholder can only deduct losses up to the extent of their adjusted basis in the S corporation stock plus any direct loans made by the shareholder to the corporation. If the loss exceeds this basis, the excess loss is carried forward to future years.

Question 7

For tax purposes, sole proprietorships pay sole proprietors guaranteed payments as compensation for their services.

Accepted Answer

Sole proprietorships do not pay guaranteed payments to the sole proprietor; instead, the sole proprietor directly reports the business's profit or loss on their personal income tax return. Guaranteed payments are more commonly associated with partnerships, where they are used to compensate partners for services or capital investment.

Question 8

If a C corporation incurs a net operating loss in 2019, it may carry the loss back two years and forward 20 years to offset income in those years.

Accepted Answer

As of the Tax Cuts and Jobs Act of 2017, net operating losses for C corporations incurred in 2018 and beyond can no longer be carried back to previous years but can be carried forward indefinitely to offset future income, subject to a limitation of 80% of taxable income for losses arising in tax years beginning after December 31, 2020.

Question 9

S corporation shareholders who work for the S corporation receive compensation in the form of guaranteed payments.

Accepted Answer

S corporation shareholders who work for the corporation receive compensation in the form of salaries or wages, not guaranteed payments. Guaranteed payments are a characteristic of partnerships and LLCs taxed as partnerships, not S corporations.

Question 10

Which of the following legal entities files documents with the state to be formally recognized by the state?
A)Limited liability company.
B)General partnership.
C)Sole proprietorship (non LLC).
D)None of the choices are correct.

Accepted Answer

A limited liability company (LLC) is a legal entity that must file documents with the state to be formally recognized by the state. General partnerships and sole proprietorships (non-LLC) do not have this requirement.

Question 11

The deduction for qualified business income applies to owners of C corporations but not to flow-through entity owners.

Accepted Answer

The deduction for qualified business income applies to owners of flow-through entities, such as S corporations, partnerships, and sole proprietorships, but not to owners of C corporations.

Question 12

Owners who work for entities taxed as a partnership receive guaranteed payments as compensation.The guaranteed payments are not self-employment income.

Accepted Answer

Guaranteed payments to owners who work for entities taxed as a partnership are considered self-employment income and are subject to self-employment taxes.

Question 13

S corporation shareholders are subject to self-employment tax on business income allocations from the S corporation if they are actively involved in the S corporation's business.

Accepted Answer

S corporation shareholders are not subject to self-employment tax on their share of the business income; instead, they pay income tax on their allocated share of the S corporation's income, regardless of their level of involvement in the business.

Question 14

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)Corporation - Corporation.
C)General partnership - Partnership.
D)Limited partnership - General partner.
E)Corporation - Corporation and Limited partnership - General partner.

Accepted Answer

Corporations are legal entities separate from their shareholders, meaning the corporation itself is responsible for its liabilities. In a limited partnership, general partners have unlimited liability for the partnership's debts, making them ultimately responsible.

Question 15

Which legal entity provides the least flexible legal arrangement for owners?
A)Corporation.
B)LLC.
C)Partnership.
D)Sole proprietorship.

Accepted Answer

A corporation provides the least flexibility for owners because it is governed by strict laws and regulations. Shareholders do not have control over the day-to-day operations of the company and are limited in their ability to make decisions compared to other legal entities. Additionally, the process for making changes to a corporation, such as issuing new shares or changing the company's bylaws, can be complex and require significant legal and administrative resources.

Question 16

Due to recent tax law changes, C corporations are no longer subject to double taxation.

Accepted Answer

C corporations are still subject to double taxation; first on the corporate income and then on the dividends distributed to shareholders.

Question 17

Business income allocations from an S corporation to its shareholders are potentially subject to the 3.8 percent net investment income tax if the shareholders are passive investors in the S corporation.

Accepted Answer

Passive investors in S corporations are subject to the 3.8 percent net investment income tax on business income allocations.

Question 18

Business income allocations to owners from an LLC that is taxed as a partnership are subject to self-employment tax if the owners are significantly involved in the entity's business activities.

Accepted Answer

Business income allocations to owners from an LLC taxed as a partnership are generally subject to self-employment tax if the owner is considered to be more than a passive investor and is significantly involved in the business activities.

Question 19

If an individual forms a sole proprietorship, which nontax factor will be of greatest benefit to the sole proprietor?
A)Liability protection.
B)Legal flexibility in defining rights and responsibilities of owners.
C)Facilitation of initial public offerings.
D)Minimal time and cost to organize.

Accepted Answer

The minimal time and cost to organize is the greatest nontax factor benefit to a sole proprietorship. It is a relatively easy and inexpensive way to establish a business because there is no formal organizing document, registration or regulatory compliance process to go through.

Question 20

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

Accepted Answer

C corporation losses are retained within the corporation and cannot be passed through to shareholders to offset their personal income on their individual tax returns. Shareholders are separate legal entities from the C corporation.

Quiz 12: Entities Overview

What document must an LLC file with the state to organize its business?

Which legal entity is generally best suited for going public?