Question 1

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 2

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

Accepted Answer

This statement is true. Special allocations allow for flexibility in how partnership income and deductions are allocated among owners, which can be useful in reflecting each owner's role and contributions to the partnership. However, the IRS requires that these allocations have substantial economic effect and are not used solely for tax avoidance purposes.

Question 3

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 4

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 generally not personally responsible for the corporation's debts and liabilities, as the corporation is a separate legal entity from its shareholders. However, in certain circumstances, such as if the shareholder personally guarantees a loan or engages in fraudulent behavior, they may be held personally liable.

Question 5

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 6

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

Accepted Answer

Corporations have easy transferability of ownership, limited liability for shareholders, and access to more funding options, making them better suited for taking a business public compared with LLCs and general partnerships.

Question 7

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

Accepted Answer

Sole proprietors are considered self-employed and are therefore subject to self-employment taxes on the net income earned from their businesses. These taxes include Social Security and Medicare taxes.

Question 8

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

Accepted Answer

Unincorporated entities with only one individual owner, also known as sole proprietorships, are not legal entities separate from their owner for tax purposes. As a result, their income and expenses are reported on the owner's personal tax return and they are subject to self-employment taxes.

Question 9

S corporations have more restrictive ownership requirements than other entities.

Accepted Answer

S corporations cannot have more than 100 shareholders and those shareholders must be U.S. citizens or residents. They also cannot have more than one class of stock. These ownership requirements are more restrictive than other entities such as C corporations or limited liability companies.

Question 10

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

Accepted Answer

Sole proprietorships are not considered separate legal entities from their owners, so they are not treated as LLCs.

Question 11

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 true as per IRS regulations. Shareholders of C corporations must recognize dividend income equal to the fair market value of the distributed property if the distributing corporation has sufficient earnings and profits. This rule applies even if the distribution in kind is not in the form of cash.

Question 12

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 indeed legally formed by filing a certificate of limited partnership with the state in which the partnership will be organized. This certificate includes important information like the name and address of the partnership, the names and addresses of the general and limited partners, and the duration of the partnership. Once the certificate is filed and the necessary fees are paid, the partnership is considered legally formed and can begin operating.

Question 13

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

Accepted Answer

Unincorporated entities, such as sole proprietorships, partnerships, and certain limited liability companies, are generally considered flow-through entities for tax purposes. This means that the profits and losses of the business are passed through to the individual owners and reported on their personal tax returns, rather than being taxed at the entity level.

Question 14

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 are able to customize their operating agreement to suit their individual needs and preferences, whereas corporate shareholders are subject to the corporation's articles of incorporation and bylaws. This makes LLCs more flexible in terms of their legal arrangements.

Question 15

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

Accepted Answer

This election is made under the provisions of subchapter S of the Internal Revenue Code and allows the corporation to become an S corporation, which is taxed as a flow-through entity. However, there are certain eligibility requirements that must be met, and the election must be made within a certain timeframe.

Question 16

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

Accepted Answer

Only unincorporated entities, such as sole proprietorships and single-member LLCs, can be considered disregarded entities for tax purposes. Incorporated entities, such as corporations, are not eligible for this classification.

Question 17

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

Accepted Answer

By default, if an unincorporated entity has multiple owners, it will be treated as a partnership for tax purposes.

Question 18

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

Accepted Answer

Both tax and nontax objectives should be considered when choosing the entity type for a new business as the choice of entity can have significant tax implications, as well as affect the management structure, liability protection, and ownership flexibility of the business.

Question 19

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, unlike losses from S corporations or partnerships which can flow through to the individual shareholders or partners.

Question 20

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

Accepted Answer

General partnerships are not required to file a partnership agreement with the state in which they are formed. They can simply operate based on an oral or written agreement between the partners. However, it is recommended to have a written partnership agreement to avoid misunderstandings and disputes between partners.

Quiz 15: Entities Overview