Question 1

The owners of Idle Time Gaming Company would like to switch to an S corporation.Unfortunately,their lawyer advised them that they do not meet some of the requirements necessary to qualify as an S corporation.An alternative form of business that would give them similar advantages is a limited liability company.

Accepted Answer

A limited liability company (LLC) is a form of business entity that combines the benefits of both a partnership and a corporation, providing owners with limited liability protection and pass-through taxation. Switching to an LLC would provide similar advantages as an S corporation, such as pass-through taxation, but without the strict eligibility criteria of an S corporation.

Question 2

When two firms join together to form one company,it is called a merger.

Accepted Answer

This statement is true. A merger is a combination of two or more companies into a single legal entity.

Question 3

If a corporation distributes after-tax profits to its stockholders in the form of dividends,the government considers these distributions as part of each stockholder's personal income.Stockholders pay taxes on these distributions.

Accepted Answer

When a corporation distributes after-tax profits to its stockholders in the form of dividends, these dividends are considered taxable income for each stockholder and they must pay taxes on them.

Question 4

The stockholders of large,publicly traded corporations have a daily pulse on the operation of the business.

Accepted Answer

While stockholders may receive regular updates on the performance of the company, they do not have a daily pulse on the operation of the business. The day-to-day operations are typically managed by the company's executives and management team.

Question 5

In order to establish a C-Corporation,it is a requirement that investors run the company,whereas in an S-Corporation,this is not the case.

Accepted Answer

This statement is incorrect. Both C-Corporations and S-Corporations can have investors who run the company as well as investors who are passive and do not participate in management. The main difference between the two types of corporations is how they are taxed.

Question 6

The organization structure of a corporation allows for stockholders to exert a significant degree of control over the company's daily operations.

Accepted Answer

The organization structure of a corporation typically involves a board of directors and executive officers who are responsible for daily operations. Stockholders have the ability to elect board members and vote on major decisions, but they generally do not exert control over day-to-day operations.

Question 7

Double taxation means that a corporation pays twice the amount of taxes as a sole proprietorship or partnership.

Accepted Answer

Double taxation refers to the situation where a corporation's profits are taxed at the corporate level and then again when they are paid out as dividends to shareholders. Sole proprietorships and partnerships are not subject to this type of taxation.

Question 8

Nutty Dough is a small chain of donut shops currently owned and operated by a group of seven partners.The owners think that their chain has the potential for rapid growth,but several of the partners are concerned about the growing financial risks that will accompany this growth.One way the partners could deal with this problem would be to incorporate their business.

Accepted Answer

By incorporating their business, the partners would be able to limit their personal financial liability and spread the risk among the shareholders. This can help mitigate the risk associated with rapid growth.

Question 9

A group of medical doctors are interested in incorporating their business.There is no advantage due to the costs involved.

Accepted Answer

Incorporating a business provides several advantages, such as limited liability protection and easier access to funding. While there may be initial costs involved, these benefits can outweigh the costs in the long run. Therefore, there could be an advantage for a group of medical doctors to incorporate their business.

Question 10

The owners of a limited liability company (LLC)must pay self-employment taxes on any profits they earn,even if they did not obtain a salary from the company.

Accepted Answer

This is true. As owners of an LLC, members are considered self-employed and must pay self-employment taxes on any profits earned by the company, regardless of whether or not they received a salary.

Question 11

Mojo Motors is a small conventional corporation with only 212 stockholders.Eleven of the stockholders are citizens of Mexico,and eight others are citizens of Canada.Due to its size and diversity in ownership,you would recommend that Mojo Motors change to an S-Corporation.

Accepted Answer

The fact that 11 of the stockholders are citizens of Mexico and 8 are citizens of Canada does not affect the eligibility of Mojo Motors to be an S-Corporation. The decision to change to an S-Corporation should be based on other factors, such as tax considerations and business strategy.

Question 12

Public utilities are examples of quasi-public corporations.

Accepted Answer

Public utilities are corporations that provide essential services such as water, gas, and electricity. They are considered quasi-public because they are privately owned but heavily regulated by the government to ensure they serve the public interest.

Question 13

The owners of California Canines,a firm that designs and manufactures coats,sweaters,jackets,and rainwear for dogs want to organize as an LLC.Two members are college students and two others are thirty something couples with young children.This is good strategy because each member can choose to commit to limited or unlimited liability.

Accepted Answer

The answer of The owners of California Canines,a firm that...

Question 14

The major differences between an S-Corporation and a Limited Liability Company are limits on the number of owners,and,the citizenship status of individuals who are owners.

Accepted Answer

The answer of The major differences between an S-Corporation and...

Question 15

If you want to sell your ownership in a publicly traded corporation,you find someone willing to buy your shares.

Accepted Answer

Shares of a publicly traded corporation can be sold to other investors who are willing to buy them on the open market.

Question 16

A few years back,your friends who are horse fanatics inherited several acres of land that they turned into a retirement haven for racehorses.Peaceful Pastures was recently incorporated as a limited liability company.The members are re-evaluating this form of ownership.Unlike an S-corporation,they now pay self-employment taxes on all company profits - not just on the salaries they pay themselves.

Accepted Answer

As a limited liability company, the members are considered self-employed and therefore pay self-employment taxes on all company profits, not just on the salaries they pay themselves. This is different from an S-corporation which only taxes the salaries paid to the owners as self-employment income.

Question 17

If a corporation has after-tax profits of $360,000,and elects to distribute this amount in the form of dividends to its stockholders,these distributions are free and clear of taxes because the corporation paid taxes on this amount prior to distribution.

Accepted Answer

While the corporation may have paid taxes on the profits, the stockholders may still be subject to taxes on the dividends they receive. Dividends are generally taxable income for the recipient.

Question 18

After a successful five years,Peaceful Pastures,LLC (a retirement ranch for race horses)thinks it may be able to attract donations from animal activist groups and even the federal government if it becomes a non-profit corporation.As its business advisor,you explain that as a non-profit corporation,the owner(s)may earn a salary but the business should not seek after-tax profits.

Accepted Answer

As a non-profit corporation, the owner(s) may earn a salary, but the business should not seek after-tax profits. Non-profit corporations are intended to serve a specific social or charitable purpose rather than to generate income for shareholders or owners. Any excess revenues are reinvested into the organization's mission rather than distributed as profits. This model is designed to incentivize charitable giving and community support.

Question 19

Chad recently invented Wave-Aerobics,a next generation watercraft that can safely perform water stunts similar to an amusement park ride.As the founder of a fast growing business,you think his goal of incorporating,"to remain in steadfast control of the firm's operations for an indefinite number of years" is good strategy.

Accepted Answer

It is not a good strategy for the founder to want to remain in control of the firm's operations for an indefinite number of years. Eventually, every business owner will need to plan for succession and potentially groom a successor to take over the business to ensure its longevity and continued success. Restricting leadership opportunities in the company can cause turnover and limit growth potential.

Question 20

Chipper's Golf Resort has the opportunity to buy 1000 acres of property adjacent to its 18-hole golf course.After talking with her banker,the owner is encouraged to begin the paperwork to change from a Limited Liability Company form of business ownership to a corporation.You applaud this strategy because she will eliminate the problem of double taxation.

Accepted Answer

Changing from an LLC to a corporation does not eliminate the problem of double taxation. In fact, corporations are subject to double taxation. The profits of a corporation are taxed at the corporate level, and then when those profits are distributed to shareholders as dividends, they are taxed again at the individual level.

Quiz 5: How to Form a Business