Chapter 18

Question 1

Sole Proprietorship

Answer 1

The simplest form of business where the owner is the business. The owner reports income on his/her personal income was return and is legally responsible for all debts and obligations incurred by the business

Question 2

What is not really an entity, but a way to do business?

Answer 2

Sole Proprietorship

Question 3

“General” Partnership

Answer 3

An agreement by 2 or more parties to carry on, as co-owners, a business for profit

Question 4

Does the agreement in a general partnership have to be written?

Answer 4

It can be oral or written (written is best though)

Question 5

Corporation

Answer 5

A legal entity formed in compliance with statutory requirements. The entity is distinct from its shareholders (limited liability of shareholders)

Question 6

Limited Partnership

Answer 6

A partnership consisting of one or more general partners (who manage the business and are liable to the full extent of their personal assets for debts of the partnership) and one or more limited partners (who contribute only assets and are liable only to the extent of their contributions)

Question 7

Limited Liability Company (LLC)

Answer 7

A hybrid form of business enterprise that offers the limited liability of the corporation but the tax advantages of a partnership

Question 8

Limited Liability Partnership (LLP)

Answer 8

A form of partnership that allows professionals to enjoy the tax benefits of a partnership while limiting their personal liability for the malpractice of other partners

Question 9

Method of Creation: Sole Proprietorship

Answer 9

Created at will by the owner

Question 10

Liability: Sole Proprietorship

Answer 10

Unlimited liability

Question 11

Management: Sole Proprietorship

Answer 11

Completely at owner’s discretion

Question 12

Taxation: Sole Proprietorship

Answer 12

Owner pays personal taxes on business income

Question 13

Method of Creation: Partnership

Answer 13

Created by agreement of the parties

Question 14

Liability: Partnership

Answer 14

Unlimited liability - no shield and the partners’ assets are at risk (BIG NEGATIVE)

Question 15

Management: Partnership

Answer 15

Each partner has a direct and equal voice in management unless expressly agreed otherwise in the partnership agreement (POSITIVE)

Question 16

Pro Rata

Answer 16

In proportion to my ownership interest
(nothing to do with capital contribution)

Question 17

Uniform Partnership Act

Answer 17

Each partner has a 1/4 interest in the company if they have 4 partners - for pro rata taxation in partnerships, income tax amount depends on the bracket the partner is in

Question 18

Method of Creation: Corporation

Answer 18

Authorized by the state under the state’s corporation law. “Articles of Incorporation”

Question 19

Liability: Corporation

Answer 19

Limited liability of shareholders - shareholders are not liable for the debts of the corporation (MAJOR POSITIVE)

Question 20

Management: Corporation

Answer 20

Shareholders elect directors, who set policy and appoint officers

Question 21

Taxation: Corporation

Answer 21

Double taxation - corporation pays income tax on net profits, with no deductions for dividends and shareholders pay income tax on disbursed dividends they receive (BIG NEGATIVE)

Question 22

Close Corporation - S Corporation

Answer 22

Elect to get out of double taxation - can be taxed as a partnership, small corporation with less than 100 shareholders

Question 23

Method of Creation: Limited Partnership

Answer 23

Created by agreement to carry on a business for profit. At least one party must be a general partner and the other(s) limited partner(s). Certificate of limited partnership is filed.

Question 24

Liability: Limited Partnership

Answer 24

Unlimited liability of all general partners. Limited partners are liable only to the extent of capital contributions

Question 25

Management: Limited Partnership

Answer 25

General partners have equal voice or by agreement. Limited partners may not retain limited liability if they actively participate in management, "silent partners". Limited partners cannot be in management.

Question 26

Taxation: Limited Partnership

Answer 26

Generally taxed as a partnership

Question 27

Method of Creation: Limited Liability Company

Answer 27

Created by an agreement of the member-owners of the company. Articles of organization are filed. Charter must be issued by the state.

Question 28

Liability: Limited Liability Company

Answer 28

Member-owners' liability is limited to the amount of capital contributions or investments, no exposure of personal assets.

Question 29

Management: Limited Liability Company

Answer 29

Member-owners can fully participate in management or can designate a group of persons to manage on behalf of the members

Question 30

Taxation: Limited Liability Company

Answer 30

LLC is not taxed, and members are taxed personally on profits "passed through" the LLC.

Question 31

Method of Creation: Limited Liability Partnership

Answer 31

Created by agreement of the partners. A statement of qualification for the limited liability partnership is filed.

Question 32

Liability: Limited Liability Partnership

Answer 32

Varies, but under the Uniform Partnership Act, liability of a partner for acts committed by other partners is limited (beyond malpractice)

Question 33

Management: Limited Liability Partnership

Answer 33

Each partner has a direct and equal voice in management unless expressly agreed otherwise in the partnership agreement

Question 34

Taxation: Partnership

Answer 34

Each partner pays pro rata share of income taxes on net profits, whether or not they are distributed, entity itself does not pay taxes

Question 35

Taxation: Limited Liability Partnership

Answer 35

Each partner pays pro rata share of income taxes on net profits, whether or not they are distributed, entity itself does not pay taxes

Question 36

Friend of Hailey's sells custom made jewelry. She has a website and takes orders in person and over the internet. She pays taxes on the income at the personal income tax rate. She has a show once a year and participates in other people's home shows. She only wants to work it part time.

Answer 36

Sole proprietorship

Question 37

2 guys name Dave attending UT in the 80s have an idea for a pizza restaurant and their signature food is hand-tossed pepperoni pizza rolls. Anyone know who I'm talking about? Double Dave's. They can take out liability insurance for the risk and they are agreeing to share profits and losses equally. They pay income taxes based on their pro rata share of the profits.

Answer 37

Partnership

Question 38

A bank owned wholly by one family but who wants to open up ownership to its employees through a profit-sharing plan (benefit plan) and eventually sell shares of stock publicly.

Answer 38

Corporation

Question 39

Fortune 500 companies are...

Answer 39

Corporations

Question 40

Real Estate Deal - a young, unestablished entrepreneur, Joe Bob, has an idea to develop 500 acres into a subdivision. He has no money and goes in search of wealthy individuals to invest in his venture.

Answer 40

Limited Partnership

Question 41

2 financial planners wish to start a company for wealth management. They will be equal partners in this venture and contribute equal capital. They also wish to buy a building for their business. A ____ can be set up to purchase the building and the wealth management ___ pays rent to the building ____.

Answer 41

LLC

Question 42

4 CPAs want to form a partnership

Answer 42

LLP