Taxation of Business Entities Study Questions with Answers
Sole Proprietorship - correct answers-Generally one person
-DBA: An Assumed Name
-Taxed once at the rate of the original owner
-No legal difference btwn the entity and the person
Limited Liability Corporations - correct answers-Not incurred to the debts of others
-Debt is set apart from the debts of the owner
-Price for every $ the corp. earns it will be taxed twice.
Corporation Attributes - correct answers-Operate under state law as an entity separate from its owners,
directors and officers
-Limited liability for Owners (Shareholders)
-Centralized Management- Directors appoint officer to run corporate act
-Free Transferability of ownership rights
-Continuity of life: not affected by the death, insanity bankruptcy or withdrawal of an owner
-Capacity for multiple (unlimited) owners
"Check the Box" Regulations - correct answersAutomatic classification of certain entities as
corporations- per se treatment
Recognition of the Corporate Entity - correct answers-Moline Products: Corporation was a seperate
entity and not an agent of the shareholder. Taxation at a corporate level.
-Bollinger: Corp. was not a separate entity but merely an agent of the shareholders. Taxation at the
shareholder level.
Income Taxation of the Corporation - correct answersCode 11: graduated tax rate structure: no lower
level brackets for personal service companies.
Code 267: limitation on Trans.
Code 448(a): accounting method
Code 1561: Multiple Corp.
,Favorable Tax Attributes - correct answers-Progressive Tax Rate Structure: (begins at 15%) Low alt min
tax (20%)
-Owners may be employees of the Corp. Split income btwn corp and owner
-Freedom to elect fiscal year
-Dividend income subject to beneficial rules
-Stock Capital Asset
-Special rule allow ordinary loss treatment on certain stock
-Stock based compensation
Unfavorable Tax Attributes - correct answers-Double Taxation of Corp. Income
-No special treatment for corp. cap gains
-No Capacity for deduct cap. losses except against gains
-Restriction on Accounting Method
-Assets can not generally be removed from the corp w/o adverse tax conseq
-Penalty taxes apply in certain circumstances
"Cradle to Grave" Approach - correct answersSignificant Interim Distributions
-Redemption & Partial Liquidations
-Stock Dividends
-306 Stock
Terminating Stock ownership int.
Corporate tax-free reorganizations
Taxable complete or partial liquidation
"C" Corporation - correct answers-Come from sub-chapter C of the Internal Revenue Code
-Independent legal entity but have its whole separate set of rules with taxes
-Files a form 1120
, "S Corporation" - correct answers-Flow Through Entity
-First have to form a C corp.
-An Election at the federal level to have there corp taxed as an S corp.
-Changes it to a Flow through entity
-Legally independent identity apart from its shareholders
-Files its own tax returns 1120S
-Benefit of being a corporation but because its flow through the $ of profit is reported but it does not
pay any tax
-Distributed Pro-Rata to the shareholders
-Limitation on the # of shareholders
-Limited to types of Shareholders
Partnerships - correct answers-Flow Through Entity
-$ will go out to the partners depending on their agreed distribution scheme
-$ not taxed at the entity level
-Partnership has to file a tax return but a partner doesn't have any limitation of liability
-All the partners have liability for the actions of the other partners
-Schedule C to the 1040
Limited Liability Companies - correct answers-Note: LLC owners can elect for the IRS to tax the LLC as a
sole proprietorship, partnership & Corporation, or S corp. Owners make this election through the IRS
after the co forms with the state
-LLC is a creation of state law
-Dont exist for federal tax purposes
Limited Liability Partnerships - correct answers-Can elect to be a partnership if only one
-2+ just by forming the LLC became a partnership
Considerations in Choosing Form - correct answers-Who owns (or will own) the business?
-What is the Nature of each owner's interest
Sole Proprietorship - correct answers-Generally one person
-DBA: An Assumed Name
-Taxed once at the rate of the original owner
-No legal difference btwn the entity and the person
Limited Liability Corporations - correct answers-Not incurred to the debts of others
-Debt is set apart from the debts of the owner
-Price for every $ the corp. earns it will be taxed twice.
Corporation Attributes - correct answers-Operate under state law as an entity separate from its owners,
directors and officers
-Limited liability for Owners (Shareholders)
-Centralized Management- Directors appoint officer to run corporate act
-Free Transferability of ownership rights
-Continuity of life: not affected by the death, insanity bankruptcy or withdrawal of an owner
-Capacity for multiple (unlimited) owners
"Check the Box" Regulations - correct answersAutomatic classification of certain entities as
corporations- per se treatment
Recognition of the Corporate Entity - correct answers-Moline Products: Corporation was a seperate
entity and not an agent of the shareholder. Taxation at a corporate level.
-Bollinger: Corp. was not a separate entity but merely an agent of the shareholders. Taxation at the
shareholder level.
Income Taxation of the Corporation - correct answersCode 11: graduated tax rate structure: no lower
level brackets for personal service companies.
Code 267: limitation on Trans.
Code 448(a): accounting method
Code 1561: Multiple Corp.
,Favorable Tax Attributes - correct answers-Progressive Tax Rate Structure: (begins at 15%) Low alt min
tax (20%)
-Owners may be employees of the Corp. Split income btwn corp and owner
-Freedom to elect fiscal year
-Dividend income subject to beneficial rules
-Stock Capital Asset
-Special rule allow ordinary loss treatment on certain stock
-Stock based compensation
Unfavorable Tax Attributes - correct answers-Double Taxation of Corp. Income
-No special treatment for corp. cap gains
-No Capacity for deduct cap. losses except against gains
-Restriction on Accounting Method
-Assets can not generally be removed from the corp w/o adverse tax conseq
-Penalty taxes apply in certain circumstances
"Cradle to Grave" Approach - correct answersSignificant Interim Distributions
-Redemption & Partial Liquidations
-Stock Dividends
-306 Stock
Terminating Stock ownership int.
Corporate tax-free reorganizations
Taxable complete or partial liquidation
"C" Corporation - correct answers-Come from sub-chapter C of the Internal Revenue Code
-Independent legal entity but have its whole separate set of rules with taxes
-Files a form 1120
, "S Corporation" - correct answers-Flow Through Entity
-First have to form a C corp.
-An Election at the federal level to have there corp taxed as an S corp.
-Changes it to a Flow through entity
-Legally independent identity apart from its shareholders
-Files its own tax returns 1120S
-Benefit of being a corporation but because its flow through the $ of profit is reported but it does not
pay any tax
-Distributed Pro-Rata to the shareholders
-Limitation on the # of shareholders
-Limited to types of Shareholders
Partnerships - correct answers-Flow Through Entity
-$ will go out to the partners depending on their agreed distribution scheme
-$ not taxed at the entity level
-Partnership has to file a tax return but a partner doesn't have any limitation of liability
-All the partners have liability for the actions of the other partners
-Schedule C to the 1040
Limited Liability Companies - correct answers-Note: LLC owners can elect for the IRS to tax the LLC as a
sole proprietorship, partnership & Corporation, or S corp. Owners make this election through the IRS
after the co forms with the state
-LLC is a creation of state law
-Dont exist for federal tax purposes
Limited Liability Partnerships - correct answers-Can elect to be a partnership if only one
-2+ just by forming the LLC became a partnership
Considerations in Choosing Form - correct answers-Who owns (or will own) the business?
-What is the Nature of each owner's interest
