Entities (Lesson 5) Flashcards
(124 cards)
1
Q
In the section process what factors are considered
A
- Ease and cost of formation
- Complexity of management and governance
- How transferability and dissolution are achieved
- Liability protection for owners personal assets
- Reporting requirements and taxation
2
Q
Are entities formed under state or federal law
A
- state law
3
Q
What must a limited liability entity do under state law to help keep the liability protection
A
- in a clearly and identifiable manner let the public know of the liability protection
- marking on business correspondence such as invoices, letterhead, business cards and through markings on vehicles with the name of the company and LLC
4
Q
What happens if the company fails to identity in contracts and correspondence of their liability protection
A
- a court could pierce the veil of liability protection or disregarding the legal status of the entity
5
Q
What is a sole proprietorship
A
- business ventures owned and operated by a single individual
6
Q
Are any filings required with the state for a sole proprietorship
A
no
7
Q
Are any assets transferred for legal consideration in a sole proprietorship
A
no
8
Q
How is the formation of a sole proprietorship
A
- Easy and inexpensive
- if collecting sale tax it must register with the state or local taxing authority
- Operation is easy in that all decisions are made by the proprietor
- any trade names or assets are owned by the individual proprietor
9
Q
How is the interest, disposal of interest, and dissolution handled for a sole proprietorship
A
- Proprietor has a 100 percent interest in the proprietorship asset and income
- relatively easy to sell assets but it does require finding a buyer
- Dissolution is achieved by simply discontinuing business operations and pay creditors or by the death of the proprietor
10
Q
How is a sole proprietorship disposed
A
- Dissolution is achieved by simply discontinuing business operations and pay creditors or by the death of the proprietor
11
Q
How is capital handles in a sole proprietorship
A
- capital for a proprietorship is limited to the resources of the proprietor including the proprietors ability to borrow
12
Q
What is the liability for a sole proprietorship
A
- sole proprietorship legal liability
- sole proprietor is personally legally liable for the debts and torts the proprietorship
13
Q
How is the management/operations of a sole proprietorship handled
A
- proprietor has the day to day management and decision making responsibilities including the hiring and firing of employees
- no guarantee of continuity beyond the proprietor
14
Q
How is the tax compliance for a sole proprietorship
A
- cost of tax compliance is low
15
Q
Does a sole proprietor have to pay unemployment tax on themselves
A
- no just their employees
16
Q
How do you calculate maximum contribution to a Keogh plan for a sole proprietor
A
- Calculate the self employed individuals contribution rate
- Calculate the self employment tax
- Calculate the self employed individuals contribution
17
Q
How do you calculate the self employed contribution rate
A
SECR = Contribution rate to other participants/ 1+ Contribution rate to other participants
18
Q
How do you calculate the net earnings subject to self employment tax
A
- Net self employment income * 92.35%
- 100% - 6.2% - 1.45% = 92.35%
19
Q
How do you calculate the self employment tax
A
Net Earnings subject to Self Employment Tax Times:
12.4% up to $142,800 (6.2% x 2 = 12.4%)
Plus: 2.9% on all income (1.45% x 2 = 2.9%)
Equals: Self Employment Tax
20
Q
How do you calculate the self employed individuals contribution to a Keogh plan
A
Net Self employment Income Less:
1/2 of Self employment tax
Equals: Adjusted Net Self Employment Income
Times: Self Employed Contribution rate
Equals: Self Employed Individuals Qualified Plan Contribution
21
Q
What is the maximum contribution to a Keogh plan for employees
A
25%
22
Q
What are the advantages of a Sole proprietorship
A
- Easy to form
- Simple to operate
- easy to sell business assets
- few administrative burdens
- income is generally passed through to the owner on Schedule C
23
Q
What are disadvantages of a Sole Proprietorship
A
- Generally have limited sources of capital
- unlimited liability
- no guarantee of continuity beyond the proprietor
- business income is subject to self employment tax
24
Q
When is a partnership automatically created
A
- when two or more individuals conduct business for a profit
25
Are general partnerships required to registered with the secretary of state of formation
- No but limited partnerships are required to register
26
Is a partnership usually easy to disposed
- Hard to dispose because any buyer will not only have to evaluate the business but also the other partners
- Partnership agreements usually have an approval process for selling a partnership interest
27
When is judicial dissolution of a partnership necessary
- when the partners cannot agree on how to conduct the business or whether to dissolve the entity
28
How is the capital portion of a partnership treated
- Capital contributed usually determines the ownership interest of the partner
- can be allocated differently though
29
How is the liability handled for a partnership
- co owner partners share the risk and rewards of the business
- each partner is jointly and severally liable for the partnership obligations
30
What is a principal disadvantage of a general partnership agreement involving liability
- all general partners in a partnership are subject to joint and several liability for the debts and obligations of the partnership
31
How is the management of a partnership treated
- partnerships are generally managed equally by all partners
- managing partner can be named
32
How are partnerships taxed
- No subject to entity level taxation
- business net income is subject to self employment tax up to 15.3%
- required to obtain a EIN
33
How is a partner contributing personal or professional services to the partnership taxed
- partner must recognize ordinary compensation income for the value of the services
- amount of income recognized becomes the partners basis in the partnership
34
What are the tax ramifications of a business operating as a partnership
- Must file 1065
- each partners share of income and expenses is reported on K-1
- Partners adjusted basis in the partnership is adjusted each year to reflect the allocated items of income and expense (Increase by income/decreased by losses, distributions, and nondeductible expenses)
35
What are the tax ramifications of withdrawals or distributions from a partnership
- withdrawal is treated as a return of capital and reduces the partners adjusted basis
- a partner with a basis of zero any additional withdrawals taken from the partnership will result in a capital gain to the partner
36
What are the advantages of a Partnership
- more sources of initial capital
- usually have more management resources available than proprietorships
- fewer administrative burdens than corporations
- income and losses are generally passed through to the partners for tax purposes
37
What are disadvantages of a partnership
- transfer of interest is more difficult than proprietorships
- unlimited liability
- income tax and basis adjustments rules can be complex
- business net income is subject to self employment tax
- partners are entitled to few tax free fringe benefits that are generally available to employees
38
What is a limited partnership
- associations of two or more persons as co owners to carry on a business for profit except that one or more of the partners have limited participation in the management of the venture and thus limited risk
- usually at least one general partner
39
What happens if a limited partner participates in the management
- becomes a general partner
40
How is a limited partnership formed
- required to file a partnership agreement or any other required documentation with the domicile state
- Partnership agreement will specify which partners are limited partners and which are general partners
41
How is a limited partnership disolved
- same as a general partnership
- limited liability feature might attracted more buyers
- the transfer of a limited partnership share might be very difficult
42
How is the capital portion of the limited partnership treated
- easier to raise capital in a limited partnership than in a general partnership because to of the availability of the liability shield for the non managing limited partners
43
How is capital in a limited partnership treated
- easier to raise in a limited partnership than in a general partnership because of the liability shield
- the limited liability may affect the partnerships ability to obtain outside financing
44
How is liability treated for a limited partnership
- limited as long as they refrain from participating in the management of the enterprise
- general partners in a limited partnership have unlimited liability
45
How is the management/operation of a limited partnership treated
- somewhat of a hybrid entity
- general partners run the business
46
Are limited partners subject to self employment tax
- no since they are passive investors
47
What are the advantages of limited partnerships
- Favorable passthrough partnership taxation status
- flexibility in structuring ownership interests
- limited partners are not personally liable for debts and obligations
48
What are the disadvantages of limited partnerships
- must file with the state to register
- general partners are liable for debts and other obligations of the limited partnership
- losses for limited partners are generally passive losses
49
What is a limited liability partnership
- a hybrid entity that provides partial liability protection to its members
- generally used by accountants, attorneys, and doctors
- partners have liability protection from the other partners acts
50
How are limited liability partnerships formed
- required to file with the domiciliary state to establish the limited liability partnership
51
How are limited liability partnerships disposed
- the same as for a general partnership
- may be hard to find a professional to transfer the interest too
52
How is capital treated for a limited liability partnership
- amount of capital contributed usually determines the ownership interest in a partnership
53
What is the liability with a limited liability partnership
- general partners of a LLP can insulate themselves from the liabilities arising from the acts of other partners
54
How is a management/operation of a limited liability partnership treated
- same as for a general partnerships
55
How is the income taxation and payroll taxes treated for a limited liability partnership
- LLPs are treated as a partnership for federal income tax purposes
- LLP is a flow through entity and is not subject to tax at the entity level
56
What are the advantages of a limited liability partnership
- favorable passthrough partnership taxation status
- flexibility in structuring ownership interests
- partners can insulate themselves from the acts of other partners
57
What are the disadvantages of limited liability partnership
- required to file with the state to register
- unlimited liability for own acts of malpractice
58
What is a family limited partnership
- is a special type of limited partnership created under state law with the primary purpose of transferring assets to younger generations using the annual exclusion and valuation discounts for minority interests and lack of marketability
59
How are family limited partnerships formed
- one or more family members transfer highly appreciated property that is expected to continue to appreciate to a limited partnership in return for both a small general (1%) and a large limited partnership interest (99%)
60
Is there any income or gift tax consequences because the entity was created
- no
61
How is property transferred to a family limited partnership
- Once the FLP is created the owner of the general and limited partnership interests values the limited partnership interests
- Limited partnership interest are able to use the minority interest rules and lack of marketability interest for valuation
- Original transferor then begins an annual gifting program utilizing the discounts, the gift tax annual exclusion, and gift splitting to transfer the interest to the younger generation
62
What is the one main features of a family limited partnership that involves the capital of the partnership
- original owner/transferor can maintain control of the property transferred by only retaining a small general partnership interest
63
What is the liability of a family limited partnership
- placing the assets in a FLP and only making gifts of limited partnership interests will not jeopardize the assets of the partnership
- can also protect assets that have been transferred from a divorce of the general partner
64
How should a family limited partnership operate in order to make sure the IRS does not challenge the FLP status
- should operate like a separate business
- Have its own checking account, EIN, payroll, and should not allow family members to withdrawal funds at will
- should also not pay personal expenses of its owners
65
What are the advantages of a family limited partnership
- Control retained by senior family members
- valuation discounts are available for minority interests
- annual exclusion gifts are generally used to transfer interests to family members
- some creditor protection
- restrictions can be placed on transferability of limited partnership interests of junior family members
- FLP is commonly used as an estate planning strategy
66
What are the disadvantages of a family limited partnership
- Attorney setup fess and costs
- periodic valuation costs
- operational requirements
- potential IRS challenges regarding valuations and discounts
67
What are Limited Liability Companies
- are separate legal entities formed by one or more individuals by meeting state statutory requirements necessary for the formation of an LLC
68
How are Limited Liability Companies forms
- same way as corporations
- the charter document is called the Articles of Organization and the state requires the entity to have a resident agent
- state will require annual filings
69
How are Limited Liability Companies interests handled
- owners contribution deterine the ownership percentage
- disposal or transferability of interest may be difficult and may be restricted to transferring only to named parties
70
How is capital handled in a Limited Liability Companies
- easier to raise in an LLC than in a proprietorship
- No limitation on number of members
- can have different classes of ownership interests which have different rights
71
What is the liability with a Limited Liability Companies
- most important feature of an LLC is that the LLCs individual owners are protected from personal liability for the LLC's debts and obligations unless they personally guarantee such obligation
- liability protection can be pierced though in extraordinary cases
72
How is the management/operations handled in a Limited Liability Companies
- managed by virtue of an operating agreement
- operating agreement specifies how and who will manage the LLC
73
Is a Limited Liability Companies required to have an operating agreement
- no but will default to be governed by state laws regarding LLC
74
How is a single member LLC taxed
- disregarded entity for federal income tax purposes
- owner must file a Schedule C
75
How is an LLC with two or more members taxed
- can elect to be a partnership, S Corporation, or a C corporation
76
How is distribution of appreciated property from an LLC to a member taxed
- gain will only be recognized to the extent that cash received exceeds the members adjusted basis
77
Is LLC income subject to self employment tax
- yes unless the LLC income derived from rental real estate or LLC members who are not the managing member and are the equivalent of a limited partner
78
What are the advantages of a Limited Liability Companies
- members have limited liability
- unlimited members
- members may be individuals, corporations, trusts, other LLCs, and other entities
- Income passed through on K-1
- No double taxation
- members can participate in managing the LLC
- distributions to members do not have to be directly proportional to the members ownership interests
- multiple classes of ownership
- can be taxed as partnership, S corp, or a C corp
79
What are the disadvantages of a Limited Liability Companies
- many have limited life
- transfer of interests is difficult and sometimes limited by operating agreement
- some industries/professions do not permit LLC status
- laws vary from stat to state regarding LLCs
- not a lot of precedent from prior court case laws
- members not meeting exceptions are subject to self employment tax on all earned income if partnership status is elected
80
What is a C corporation
- are chartered legal entities formed by one or more individuals by meeting state statutory requirements necessary for the formation of a corporation
81
What are the two types of corporations
- C corporations
- S corporations
82
How are corporations created
- by filing a charter document with he state of incorporation
- document requires a corporation to disclose its name, number of shares, and the purpose of the corporation
- Required to name a registered agent located in the state of incorporation
83
How is the interest of a corporation held
- held by shareholders in share of stock certificates
- shares may be easily transferred if there is a market but some small corporations restrict the transfer of shares
84
How is capital treated in a corporation
- can raise capital more easily than a proprietorship or partnership
85
What is the liability under a corporation
- liability is limited to the invested capital
86
How is management/operation of a corporation handled
- managed by one or more officers appointed by the board of directors
- board of directors is the governing body of the corporation
- board of directors acts in a very formal way and is required under the corporate charter to meet and follow certain formalities
87
How is a corporation taxed
- taxed as a C corp unless S corp status is elected
- owner/employees of both C and S corps are treated as employees for payroll tax purposes
- Distributions of cash and other assets to shareholders are considered dividends
88
What happens if non cash distributions of appreciated property are made to shareholders/employees
- gain must be recognized at the corporate level as if the property had been sold and the cash proceeds distributed
- C corp this is taxed at the C corp level
- S corp this is passed through on the K-1
89
What is the dividend received deduction for a 20% ownership
50%
90
What is the dividend received deduction for at least 20% and less than 80% ownership
65%
91
What is the dividend received deduction for at least a 80% ownership
100%
92
What happens if a corporation incurs a net operating loss after the tax year end December 31, 2017
- if loss is not fully utilized it can be carried forward indefinitely
93
What is a Personal Service Corporation (PSC)
- a C corporation in which substantially all of the activities involve the performance of services in the fields of health, law, engineering, architecture, accounting, actuarial science, or consulting and all of the stock is owned by employees
94
What is the tax rate of a personal service corporation
- flat rate of 35% not at the regular corporate income tax rate
95
What are the tax ramifications of withdrawals or distributions from a Corporation
- treated as dividends and are subject to double taxation
96
What are the advantages of a C Corporation
- relative ease of raising capital
- limited liability of shareholders
- unlimited life of entity
- ease of transfer of ownership interests
- generally more management resources
- shareholder/employees may receive full array of employer provided tax free fringe benefits
97
What are the disadvantages of a C Corporation
- Double taxation
- administrative burdens
- difficult to form and dissolution can cause taxable gains
- borrowing may be difficult without stockholder personal guarantees
- requires a registered agent - requires a federal tax ID number
98
What is an S Corporation
- normally created under state law by first forming a C corp and then filing an S election with the IRS
99
What requirements must an C corporation meet to be an S corporation
- S corporation cannot have more than 100 shareholders
- ownership is restricted to individuals who are US citizens or US residents, estates, trusts (ESBT), and charitable organizations
- corporation must be an eligible corporation created under the laws of the united states
- only one class of outstanding stock
100
How is capital handled for an S corporation
- easier to raise capital in an S corporation than in a proprietorship or partnership because of the limited liability protection
101
What is the liability protection under a S corporation
- same liability protection as a C corp or an LLC
- liability is limited to the shareholders capital contributions
102
When can an S corporation shareholder be held personally liable for the debts of the corporation
- a lender to a closely held corporation requires that the primary shareholders guarantee the loan to the corporation (Shareholder is liable to the extent of the guarantee)
- Court may ignore the legal fiction of the corporation as an entity (pierce the corporate veil) when the corporation has been used to perpetuate fraud, circumvent law, accomplish an illegal purpose, or otherwise evade law
103
When can the courts disregard the corporate form of an entity
- if the corporation is not maintained as a separate entity from its shareholders
104
How is the management/operations of a S corporation handled
- Same as a corporation
105
How is a S corporation taxed
- Income of an S corporation passes through to shareholders and is not taxed at the corporations
- the owner/employees of the S corporation are employees so are subject to payroll tax
- distributions must be equal to all shareholders
- S corporation itself does not pay tax
- Ordinary income allocated to a shareholder from an S corporation is not subject to self employment tax
106
How are withdrawals from an S corporation treated
- considered nontaxable return of capital to the extent of shareholder basis
- any distribution in excess of basis is treated as a capital gain
107
What are the advantages of a S corporation
- income is passed through to the shareholders
- income is taxed at the individual level
- shareholders have limited liability
- distributions from S corporation are exempt from the payroll tax system but adequate compensation must be paid to employees
108
What are the disadvantages of a S corporation
- limited to 100 shareholders
- only one class of stock
- cannot have corporate, partnership, certain trusts, or nonresident alien shareholders
- shareholder employees that own more than 2% of the company must pay taxes on a range of employee fringe benefits that would be tax free to a shareholder/employee of a C corporation
- tax rate of the individual shareholder may be higher than the corporate tax rate
- borrowing may be difficult without stockholder personal guarantees
109
When is a corporation a Personal Holding Company
- PHC income test. At least 60% of the corporations adjusted ordinary gross income for the tax year is from dividends, interest, rent, and royalties
- Stock Ownership Requirement. At any time during the last half of the year more than 50% in value of the corporations outstanding stock is owned directly or indirectly by 5 or fewer individuals
110
What is the Personal Holding Company income test
- At least 60% of the corporations adjusted ordinary gross income for the tax year is from dividends, interest, rent, and royalties
111
What is the Personal Holding Company stock ownership requirement test
- At any time during the last half of the year more than 50% in value of the corporations outstanding stock is owned directly or indirectly by 5 or fewer individuals
112
What is the cost to create (money and time) of the below entities:
- Proprietorship =
- General Partnership =
- Limited Partnership =
- LLP =
- FLP =
- LLC =
- S Corporation =
- C Corporation =
- Proprietorship = Low
- General Partnership = Medium
- Limited Partnership = Medium-High
- LLP = High
- FLP = High
- LLC = High
- S Corporation = High
- C Corporation = High
113
What is there Personal Liability of investors for enterprise debt of the below entities:
- Proprietorship =
- General Partnership =
- Limited Partnership =
- LLP =
- FLP =
- LLC =
- S Corporation =
- C Corporation =
- Proprietorship = Yes
- General Partnership = Yes
- Limited Partnership = No (if limited partner)
- LLP = Yes
- FLP = Yes
- LLC = No
- S Corporation = No
- C Corporation = No
114
What is annual state filing requirement of the below entities:
- Proprietorship =
- General Partnership =
- Limited Partnership =
- LLP =
- FLP =
- LLC =
- S Corporation =
- C Corporation =
- Proprietorship = No
- General Partnership = Generally Not
- Limited Partnership = Yes
- LLP = Yes
- FLP = Yes
- LLC = Yes
- S Corporation = Yes
- C Corporation = Yes
115
What is the Maximum owners of the below entities:
- Proprietorship =
- General Partnership =
- Limited Partnership =
- LLP =
- FLP =
- LLC =
- S Corporation =
- C Corporation =
- Proprietorship = One
- General Partnership = Unlimited
- Limited Partnership = Unlimited
- LLP = Unlimited
- FLP = Unlimited
- LLC = Unlimited
- S Corporation = 100
- C Corporation = Unlimited
116
What is the owner known as for the below entities:
- Proprietorship =
- General Partnership =
- Limited Partnership =
- LLP =
- FLP =
- LLC =
- S Corporation =
- C Corporation =
- Proprietorship = Owner
- General Partnership = Partner
- Limited Partnership = Partner or Limited Partner
- LLP = Partner or Limited Partner
- FLP = Partner or Limited Partner
- LLC = Member
- S Corporation = Shareholder
- C Corporation = Shareholder
117
What is the tax filing alternatives for the below entities:
- Proprietorship =
- General Partnership =
- Limited Partnership =
- LLP =
- FLP =
- LLC =
- S Corporation =
- C Corporation =
- Proprietorship = Schedule C
- General Partnership = 1065 and flows to Schedule E
- Limited Partnership = 1065 and flows to Schedule E
- LLP = May file as corporation or partnership
- FLP = 1065 and flows to Schedule E
- LLC = one member - disregarded, Multi - same as partnership
- S Corporation = 1120S K-1 to shareholders
- C Corporation = 1120
118
What is the Federal tax ID requirement of the below entities:
- Proprietorship =
- General Partnership =
- Limited Partnership =
- LLP =
- FLP =
- LLC =
- S Corporation =
- C Corporation =
- Proprietorship = No
- General Partnership = Yes
- Limited Partnership = Yes
- LLP = Yes
- FLP = Yes
- LLC = no if one member, yes if multi
- S Corporation = Yes
- C Corporation = Yes
119
What is the taxation concept of the below entities:
- Proprietorship =
- General Partnership =
- Limited Partnership =
- LLP =
- FLP =
- LLC =
- S Corporation =
- C Corporation =
- Proprietorship = Individual
- General Partnership = Flow through
- Limited Partnership = Flow through
- LLP = Flow through
- FLP = Flow through
- LLC = Flow through
- S Corporation = Flow through
- C Corporation = Entity
120
How is the Owners income tax as for the below entities:
- Proprietorship =
- General Partnership =
- Limited Partnership =
- LLP =
- FLP =
- LLC =
- S Corporation =
- C Corporation =
- Proprietorship = Self employment income
- General Partnership = GP - Self employment income. LP - not subject to SS tax unless they perform personal services
- Limited Partnership = GP - Self employment income. LP - not subject to SS tax unless they perform personal services
- LLP = GP - Self employment income. LP - not subject to SS tax unless they perform personal services
- FLP = GP - Self employment income. LP - not subject to SS tax unless they perform personal services
- LLC = Depends of filing choice
- S Corporation = W-2 and ordinary income, Excess profits distributed are not subject to SS tax
- C Corporation = W-2 and dividend income
121
If you expect the business to have significant personal income and you expect the business to have losses which type of entity should be considered
- flow through entity
122
If you want to be able to allocate income/losses in percentages different than ownership which type of entity should be considered
- LLC taxed as a partnership
123
If you are concerned about liability which entity types should be avoided
- sole proprietorship and general partnerships
124
If significant income is expected form the business which entity should be considered
- C corporation
