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Exam 12: Entities Overview

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Question 31

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

A) True
B) False

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Question 32

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

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B) False

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Question 33

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What document must LLCs file with the state to organize their business?

Taylor would like to organize DRK as either an LLC or as a C corporation generating a 13 percent annual before-tax rate of return on a $250,000 investment. Individual and corporate tax rates are both 30 percent and individual capital gains and dividends tax rates are 5 percent. DRK will distribute its earnings annually to either its members or shareholders. a. Ignoring self-employment taxes, how much would Taylor keep after taxes if DRK is organized as either an LLC or as a C corporation? b. Ignoring self-employment taxes, what are the overall (combined owner and entity level) tax rates if DRK is organized as either an LLC or as a C corporation?

Becca would like to organize BMI as either an LLC or as a C corporation generating a 4 percent annual before-tax rate of return on a $450,000 investment. Individual ordinary rates are 28 percent, corporate rates are 15 percent, and individual capital gains and dividends tax rates are 15 percent. BMI will distribute its earnings annually to either its members or shareholders. a. Ignoring self-employment taxes, how much would Becca keep after taxes if BMI is organized as either a LLC or as a C corporation? b. Ignoring self-employment taxes, what are the overall (combined owner and entity level) tax rates if BMI is organized as either an LLC or as a C corporation?

What is the tax impact to a C corporation or an S corporation when it makes a property distribution to a shareholder?

Generally, which of the following flow-through entities can elect to be treated as a C corporation?

Roberto and Reagan are both 25 percent owner/managers for Bright Light Inc. Roberto runs the retail store in Sacramento, CA, and Reagan runs the retail store in San Francisco, CA. Bright Light Inc. generated a $125,000 profit companywide made up of a $75,000 profit from the Sacramento store, a ($25,000) loss from the San Francisco store, and a combined $75,000 profit from the remaining stores. If Bright Light Inc. is an S corporation, how much income will be allocated to Roberto?

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

On which form is income from a single member LLC with one corporate (C corporation) owner reported?

Rodger owns 100% of the shares in Trevor Inc., a C corporation. Assume the following for the current year: $\begin{array} { | l | } \hline \text { Trevor Inc.'s pre-tax income } = \$ 16,000 \\\hline \text { Trevor Corp's marginal tax rate } = 35 \% \\\hline \text { Percentage of after-tax earnings retained by Trevor Corp } \\= 0 \% \text { (i.e. all after-tax earnings distributed) } \\\hline \text { Rodger's dividend tax rate } = 5 \% \\\hline\end{array}$ Given these assumptions, how much cash does Rodger have from the dividend after all taxes have been paid?

Jaron would like to organize TMZ as either an LLC or as a C corporation generating a 6 percent annual before-tax rate of return on a $200,000 investment. Individual and corporate tax rates are both 40 percent and individual capital gains and dividends tax rates are 10 percent. TMZ will distribute its earnings annually to either its members or shareholders. a. Ignoring self-employment taxes (and the additional Medicare Tax), how much would Jaron keep after taxes if TMZ is organized as either an LLC or a C corporation? b. Ignoring self-employment taxes (and the additional Medicare Tax), what are the overall tax rates (combined overall and entity level) if TMZ is organized as either an LLC or as a C corporation?

If an individual forms a sole proprietorship, which nontax factor will be of greatest benefit to the sole proprietor?

Which legal entity is generally best suited for going public?

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

From a tax perspective, which entity choice is preferred when a liquidating distribution occurs and the entity has assets that have declined in value?

Which legal entity is correctly paired with the party that bears the ultimate responsibility for paying the legal entity's liabilities?

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

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.

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