Question 1

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 paying the S corporation's debts. The corporation itself is liable for its debts and liabilities. However, shareholders may be required to contribute additional funds to the corporation to cover any losses or expenses.

Question 2

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

Accepted Answer

If an entity is incorporated it is a corporate entity for tax purposes and cannot be a disregarded entity.

Question 3

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

According to the Internal Revenue Code, shareholders of C corporations who receive 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.

Question 4

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

Accepted Answer

Unincorporated entities with only one individual owner are taxed as sole proprietorships, meaning that the income and expenses of the business are reported on the owner's personal tax return.

Question 5

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 customization of how profits and losses are divided among partners, based on agreed-upon criteria such as ownership percentage, active participation in the business, or capital contributions. This flexibility can help partnerships better align the allocation of income and tax burdens with the needs of individual partners.

Question 6

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

Accepted Answer

Corporations file articles of incorporation.

Question 7

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

Accepted Answer

An S-Corporation election achieves this purpose.

Question 8

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

Accepted Answer

Sole proprietorships are not considered as a distinct entity from its owner; therefore, the owner is personally accountable for all debts and responsibilities of a sole proprietorship.

Question 9

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

Accepted Answer

General partnerships may be formed by written agreement among the partners, called a partnership agreement, or may be formed informally without a written agreement when two or more owners join together in an activity to generate profits.

Question 10

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 11

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

Accepted Answer

When an unincorporated entity has multiple owners, it is automatically classified as a partnership for tax purposes. However, the owners can choose to elect to be taxed as a corporation if they so choose.

Question 12

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

Accepted Answer

Corporations have a more established legal structure that is better suited for taking a business public, including the ability to issue and sell stock to the public. LLCs and general partnerships do not have this same structure and may face more legal complications in the process of going public.

Question 13

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

Accepted Answer

Sole proprietors are considered self-employed and therefore must pay self-employment taxes on the net income from their businesses. This includes both the employer and employee portion of Social Security and Medicare taxes.

Question 14

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

Accepted Answer

As unincorporated entities do not have a separate legal entity from their owners, they are treated as flow-through entities for tax purposes. This means that the entity's income, deductions, and credits are passed through to its owners, who report them on their individual tax returns.

Question 15

S corporations have more restrictive ownership requirements than other entities.

Accepted Answer

S corporations are limited to 100 shareholders, all of whom must be U.S. citizens or residents and cannot be other entities. This ownership restriction sets them apart from entities like LLCs or C corporations, which do not have such strict requirements.

Question 16

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, such as limited liability, ease of management, and ability to raise capital. Ignoring either aspect could result in a less than optimal choice for the business.

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

LLCs have greater flexibility in terms of their legal arrangements compared to corporations. This includes the ability to customize their management, profit-sharing, and decision-making structures. Additionally, LLC members are not subject to the same strict ownership and management requirements as corporate shareholders.

Question 18

A single-member LLC is taxed as a partnership.

Accepted Answer

Single-member LLCs are taxed as sole proprietorships.

Question 19

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

Question 20

C corporations and S corporations are separate taxpaying entities that pay tax on their own income.

Accepted Answer

S corporations are flow-through entities whose income "flows through" to their owners who are responsible for paying tax on the income.

Quiz 12: Entities Overview