R4-3 Flashcards
John and Jane Dorian currently operate a very successful business selling pet supplies. Their CPA has advised them to consider forming an LLC. Which of the following would be a reason to select the LLC form?
a.
The Dorians expect to have an initial public offering (IPO) of common stock in the next year.
b.
The Dorians’ LLC would be considered a disregarded entity for federal income tax purposes.
c.
An LLC does not have “double taxation” if taxed as a partnership.
d.
Members of an LLC do not have the right to amend the LLC operating agreement; only the “owner” members, Jane and John, could do this.
Choice “c” is correct. LLCs can select whether to be taxed as a partnership, corporation or sole proprietorship. An LLC with at least two owners is taxed as a partnership unless an election is made to be taxed as a corporation.
Choice “a” is incorrect. An LLC cannot become a public company. It must convert to a corporation before issuing an IPO.
Choice “d” is incorrect. All LLC members generally have the right to amend the LLC operating agreement, provide input, and manage LLCs. The Dorians may not view this “sharing” as a positive feature of their organization.
Choice “b” is incorrect. A single-member LLC is considered a disregarded entity for federal income tax purposes and is treated as a sole proprietorship. It appears that both Jane and John Dorian will be “members” and should be able to elect either a partnership or corporation for tax purposes.
Anderson and Decker are equal members in Andek, an LLC, which has not elected to be treated as a corporation. Anderson contributes $7,000 cash, and Decker contributes a machine with an adjusted basis of $5,000 and fair market value of $10,000, subject to a liability of $3,000. What is Decker’s basis in Andek?
a.
$2,000
b.
$10,000
c.
$5,000
d.
$3,500
Choice “d” is correct. This LLC has not elected to be treated as a corporation. Therefore, it will be treated as a partnership by default. Decker’s basis will be the adjusted basis of the property contributed less 50% of the liability, which is assumed by the other partner. $5,000 – $1,500 = $3,500.
Choice “a” is incorrect. $2,000 would be Decker’s basis if it were reduced by the entire $3,000 liability.
Choice “c” is incorrect. $5,000 would be Decker’s basis if it were not reduced by any of the liability.
Choice “b” is incorrect. $10,000 is the FMV of the property contributed.
