2-6 Evaluate a situation to recommend the most appropriate business form. Flashcards
Business Forms
Simplicity of Formation and Operation: A _____ generally must prepare annual minutes of action for the shareholders and board of directors, keep a corporate minutes book, have a corporate seal and stock certificates, maintain a corporate stock transfer ledger, and meet a variety of other requirements. The corporation is a separate taxable entity and must file a separate corporate tax return on Form 1120.
Sole proprietorship
General partnership
C corporation
S corporation
LLC or LLP
(LO 1-6)
C corporation
Risk of Personal Liability
There is no legal distinction between the owner as an individual and the business enterprise. The owner is individually and personally liable for all of the debts of the business.
Sole proprietorship
General partnership
C corporation
S corporation
LLC or LLP
(LO 1-6)
Sole proprietorship
Business Forms
To qualify as an _____, a corporation must
(1) have only one class of stock;
(2) have no more than 100 (after 2004) shareholders, all of whom consent to the election; and
(3) have shareholders who are all either citizens or resident aliens of the United States, or certain types of estates or trusts.
Sole proprietorship
General partnership
C corporation
S corporation
LLC or LLP
S corporation
Business Forms
Continuity of the Business: The death or bankruptcy of an individual may result in the termination of the company from both a legal and practical standpoint. The creditors of a bankrupt partner or the estate of a deceased partner may have such a claim on the assets of the partnership that it will no longer be able to operate.
Sole proprietorship
General partnership
C corporation
S corporation
LLC or LLP
(LO 1-6)
General partnership
Business Forms
Availability of Capital: Subject to securities law registration requirements, along with market limitations, a _____ has a very large potential pool of investment capital available to it through the issuance of stock or other types of securities.
Sole proprietorship
General partnership
C corporation
S corporation
LLC or LLP
(LO 1-6)
C corporation
Management Characteristics
Management of the _____ is determined by reference to the operating agreement. The entity may be member-managed, or the entity may hire outside management.
Sole proprietorship
General partnership
C corporation
S corporation
LLC or LLP
(LO 1-6)
LLC or LLP
Business Forms
Basic Income Tax Characteristics: Business revenues and expenses are allocated among the partners, reported to them by the company on Schedule K–1 of Form 1065, and reported by each partner on Schedule E of Form 1040.
Sole proprietorship
General partnership
C corporation
S corporation
LLC or LLP
(LO 1-6)
General partnership
Business Forms
Winston Palmer and Gina Salem are contemplating purchasing a business. Control and ownership of the business will be divided equally. The nature of the business is relatively risk free. Both owners plan to actively participate in the business. The business occasionally will require the owners to guarantee debt and make small capital contributions. Gina and Winston are both independently wealthy. Each is in the 28% marginal income tax bracket. The business will produce tax credits annually and will produce small net profits or sporadic operating losses. Both Gina and Winston are confident that the business property will greatly appreciate over the next five years, regardless of the success of the business. Select the most appropriate business form and justify your selection.
Sole proprietorship
General partnership
C corporation
S corporation
LLC or LLP
2-6
A general partnership is the most appropriate business form, because of the risk-free business, guarantee of debt, and pass-through of tax credits.
Business Forms
Louis Manatta has opened a restaurant and lounge. He anticipates marginal profits or losses for five years. Because he is taking over a bank foreclosure, he is not putting much of his own money into the business. Louis’s wife earns a substantial salary as a corporate attorney. They are in the 33% marginal income tax bracket and file jointly. His son and grandson have both expressed an interest in working with Louis. It would mean a great deal to Louis to establish a family business. Select the most appropriate business form and justify your selection.
Sole proprietorship
General partnership
C corporation
S corporation
LLC or LLP
2-6
An S corporation is the most appropriate business form, because of the transferability of interest, continuity of business life, flow-through of marginal profits and losses, and limited liability.
Business Forms
Paul Lucas operates a small consulting business in addition to being employed full time in his engineering position. Paul’s wife is not employed outside the home. They anticipate joint taxable income of $42,000 this year. In addition, net earnings from the consulting business will be approximately $3,500. Paul feels that there is little risk in the types of projects he undertakes. Select the most appropriate business form and justify your selection.
Sole proprietorship
General partnership
C corporation
S corporation
LLC or LLP
2-6
A sole proprietorship is the most appropriate business form, because of little risk, small net income, and ease of operation.
Business Forms
Del Rader and his nephew, Stewart, are considering starting an auto repair business. They are interested in sharing management responsibility. Neither Del nor Stewart has any formal business education, and neither has much patience for paperwork related to the business. Both Del and Stewart have moderate incomes from other sources, and each of their spouses is employed. They anticipate they will contribute a small amount of capital to the business, and they expect to incur losses for the first several years. They anticipate substantial MACRS deductions generated by equipment purchases. Del and Stewart each file joint returns with their respective spouses. Del anticipates $51,000 of taxable income this year without the auto repair business. Stewart anticipates $39,000 of taxable income this year without the business. Select the most appropriate business form and justify your selection.
Sole proprietorship
General partnership
C corporation
S corporation
LLC or LLP
2-6
A partnership is the most appropriate business form, because of the ability to share management responsibility, lack of patience for paperwork eliminates corporate forms of doing business, and pass-through of losses (insurance would likely be an important factor). Many students have suggested the LLC, due to the liability protection. This would be a good answer, as well.
Business Forms
Dr. Jeff Winters has substantial assets and is well into the 33% marginal income tax bracket. He and about 40 of the other doctors at the hospital where he practices are considering the purchase of a historic structure for remodeling into medical offices. They intend to hire professional management and retain all the ownership to secure the tax credits and MACRS deductions. There is substantial risk in the project. Select the most appropriate business form and justify your selection.
Sole proprietorship
General partnership
C corporation
S corporation
LLC or LLP
2-6
An S corporation is the most appropriate business form, because of the limited liability, flow-through of rehabilitation credits and MACRS deductions. An LLC would also be appropriate. A limited partnership would not be appropriate because there is no indication that any of the doctors are comfortable with the liability associated with being the general partner.
Business Forms
Belle Meyers and two of her sisters are contemplating opening an art gallery. Each of the three sisters is in the 35% marginal income tax bracket, and each has accumulated wealth. Although their respective husbands are very supportive, they want to ensure that the risky endeavor will not deplete the family fortunes. They want to limit personal liability to their investments and to secure any tax losses for their personal tax returns. The sisters anticipate start-up losses for five years and an initial investment of $125,000 each. Select the most appropriate business form and justify your selection.
Sole proprietorship
General partnership
C corporation
S corporation
LLC or LLP
2-6
An S corporation is the most appropriate business form, because of the limited liability and flow-through of losses. An LLC would also be appropriate.
Business Forms
Martha Wiedener owns a floral shop. Martha is not married and has taxable income of $111,500 from investments. Martha anticipates that after several years of losses and marginal profits, the floral shop will produce a profit in excess of $70,000. Martha also is contemplating bringing two nieces and a nephew into the business at some point in the future. Select the most appropriate business form and justify your selection.
Sole proprietorship
General partnership
C corporation
S corporation
LLC or LLP
2-6
An S corporation is the most appropriate business form, because of the transferability of interest and flow-through of start-up losses.
Business Forms
Francis Bidaski owns a profitable machine shop. Francis is having some difficulty in expanding the business quickly enough to meet his customer demand. His wife is a pediatrician, and their joint taxable income exceeds $250,000. Of their taxable income, $140,000 is attributable to the machine shop. Francis would like to expand the business more rapidly. Select the most appropriate business form and justify your selection.
Sole proprietorship
General partnership
C corporation
S corporation
LLC or LLP
2-6
A C corporation is the most appropriate business form, because of the ease of acquiring business capital for expansion, a separate taxable entity, ability to split income, and limited liability. An LLC that elects to be treated as a corporation would also work.
