Question 1

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

Accepted Answer

Special allocations allow for greater flexibility in distributing profits and losses among partners based on various factors, including their level of involvement and contributions to the partnership. This can help to incentivize owners to work harder and contribute more to the business, while also ensuring that each partner's individual needs are taken into account.

Question 2

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

Accepted Answer

This means that the owner of a sole proprietorship has unlimited personal liability for any debts or legal issues the business may face.

Question 3

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

Accepted Answer

Corporations have a more established structure and framework for issuing and trading shares, making them a more natural fit for going public. LLCs and general partnerships, on the other hand, do not have the same established framework for public offerings and may need to restructure or convert to a corporation in order to do so.

Question 4

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

Accepted Answer

Unincorporated entities with only one individual owner are typically taxed as sole proprietorships, meaning the income or loss is reported on the owner's personal income tax return.

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

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 formed by filing a certificate of limited partnership with the state in which the partnership will be organized.

Question 7

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 not personally responsible for the S corporation's debts. S corporations are pass-through entities, meaning that the corporation itself is not taxed on its income or losses, but the shareholders are taxed on their share of the income or losses. However, if a shareholder personally guarantees a loan or debt of the S corporation, then they may be held personally liable.

Question 8

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 any paperwork with the state to be legally formed. They can be created simply by two or more individuals agreeing to operate a business together.

Question 9

Both tax and nontax objectives should be considered when choosing an appropriate business entity.

Accepted Answer

When choosing a business entity, it is important to consider both tax and nontax objectives. Tax objectives may include minimizing taxes, while nontax objectives may include limiting personal liability or attracting investors. A thorough evaluation of these factors can help determine the most appropriate business entity.

Question 10

All unincorporated entities are generally treated as flow-through entities for tax purposes.

Accepted Answer

This means that the income and expenses of the entity are passed through to the owners or members, who report the items on their individual tax returns.

Question 11

Corporations are legally formed by filing articles of organization with the state in which the corporation will be created.

Accepted Answer

Corporations are legally formed by filing articles of incorporation, not articles of organization, with the state in which the corporation will be created.

Question 12

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 13

In certain circumstances, C corporations can elect to be treated as flow-through entities.

Accepted Answer

C corporations can make an election to be treated as an S corporation for federal tax purposes, which allows them to be treated as a flow-through entity. This is commonly known as an S corporation election. However, not all C corporations are eligible to make this election and there are various requirements that must be met.

Question 14

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

Accepted Answer

Sole proprietors are considered self-employed, and as such they must pay self-employment taxes on their net income. These taxes include both the employer and employee portions of Social Security and Medicare taxes.

Question 15

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 16

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

Shareholders of C corporations are required to recognize dividend income equal to the fair market value of the distributed property if the corporation has sufficient earnings and profits. This is outlined in Section 301(c) of the Internal Revenue Code.

Question 17

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

This is because LLCs have the ability to create operating agreements that can be tailored to meet the specific needs of the members, whereas corporate shareholders are generally subject to more rigid legal requirements and regulations.

Question 18

S corporations have more restrictive ownership requirements than other entities.

Accepted Answer

S corporations cannot have more than 100 shareholders and can only have individual shareholders who are U.S. citizens or residents, certain types of trusts, and estates as shareholders. Other entities, such as C corporations or LLCs, do not have these ownership restrictions.

Question 19

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

Accepted Answer

This is because the default classification for multi-owner unincorporated entities is a partnership. If they wish to be taxed differently, they must file the appropriate paperwork with the IRS.

Question 20

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

Accepted Answer

This is true. Disregarded entities are entities that are not recognized for tax purposes and their income is instead reported on the owner's personal tax return. Only unincorporated entities, such as sole proprietorships and single-member LLCs, can be considered disregarded entities.

Quiz 15: Entities Overview