Business Entities

Question 1

What are the 5 types of business entities?

Answer 1

Sole proprietorship, partnership, limited liability partnership, corporation, limited liability company.

Question 2

Which are the easiest to form?

Answer 2

Proprietorships and partnerships.

Question 3

Which type of entity does NOT get liability protection?

Answer 3

Proprietorships, general partnerships, general partners of a limited partnership have limited liability protection.

LLP - limited liability partners - only have limited liability protection.

Question 4

What taxes does a sole proprietor pay?

Answer 4

Up to 15.3% on his own income + 1/2 of employees social security

Question 5

How do you calculate self-employment tax?

Answer 5

Net income x 92.35% (withholding deductions) = Net earnings.

(Net earnings x 12.4% up to 142,800) + (2.9% x all income) = Self employment tax.

Question 6

What is the self-employed contribution rate?

Answer 6

Contribution rate to other participants ÷ (1 + contribution to other participants)

Question 7

Calculate the Keogh plan contribution

Answer 7

Net self-employ income
- 1/2 SE taxes
= Earned income
X SE contribution rate
= Keogh contribution

Question 8

What is Schedule C?

Answer 8

SE income and expense

Question 9

What is a general partnership?

How do you set one up?

Answer 9

It’s the simplest kind of partnership. It usually doesn’t require filing a form to set it up.

Question 10

What is one difficulty of a general partnership?

Answer 10

Getting everyone to agree to make a decision.

Question 11

Do general partnerships need EINs?

Answer 11

Yes, if they have employees.

Question 12

How am I taxed if I contribute services in exchange for a share in a partnership?

Answer 12

I must declare the value of my services as OI. This value is then the basis for my share.

Question 13

What is the legal liability of general partners?

Answer 13

Absolute.

Question 14

How are general partnerships taxed?

Answer 14

They file form 1065 and schd. K. This shows all income distributed to partners. Ea. Partner then passes the income thru to his 1040.

Each partner’s income is then subject to 15.3%

Question 15

Can general partners receive employee fringe benefits?

Can they contribute to a retirement plan?

Answer 15

No—they’re not employees.

Yes if they make the same calculations a sole proprietor makes to contribute to a Keogh.

Question 16

How are general partners taxed?

Answer 16

They report their earnings as ordinary income, pay self-employment tax on it, and increase their basis by it.

Question 17

How are partner withdrawals taxed?

Answer 17

As a return of basis until basis is zero, then as a capital gain.

Question 18

What are advantages/disadvantages of general partnerships vis a vie proprietorships?

Answer 18

Management is more complex, as is selling partnership interests. Taxation is more complex.

Liability is still massive.

Easier access to capital, counsel, skills.

Question 19

What is a limited partnership?

How do they work?

Answer 19

It is a hybrid of a general partnership and a limited liability partnership.

Limited partners have limited liability as long as they have no management role. Their income is ordinary income. Losses are passive losses.

Must file annually with state.

Question 20

What is a limited liability partnership?

Answer 20

Usually a group of professionals. The limited liability means they hold no liability for the acts of the other partners.

Question 21

What is a family limited partnership?

Answer 21

It’s a structure used to transfer assets to a younger generation using annual exclusions and valuation interests.

Question 22

How do Family Limited Partnerships FLPs work?

Answer 22

One family member transfers appreciated assets into the FLP in exchange for a 1% interest. He becomes the general partner, and the others are limited liability partners.

He begins gifting partnership assets to family members. These are valued at maybe 30% discount since the LPs have no control over them and they’re not very marketable. He also uses annual exclusions to keep the gifts from being taxable.

Question 23

Do the generational tax benefits in the FLP hold up to IRS scrutiny?

Answer 23

Yes as long as the business keeps going and the family stays out of it. When funds are co-mingled it can lose its status as a partnership.

Question 24

How is an LLC with 2 or more members taxed?

Answer 24

It has choice! Can either be as a partnership, an s-corp. or a c-corp.

Question 25

How is gain property distributed from an LLC to an LLC member taxed?

Answer 25

It isn’t. Gain is only recognized when cash received exceeds adjusted basis.

Question 26

What are Dividend Received Deductions?

What are dividend received deduction rates?

Answer 26

When the owner of a corporation receives a dividend he gets a DRD based on his ownership %:

Less than 20%, DRD = 50%
20-80%, DRD = 65%
80-100%, DRD = 100%

Question 27

What is the tax rate of a personal service corporation?

Answer 27

Flat 35%

Question 28

What is the double taxation of dividends for corporations?

What mitigates it a tad?

Answer 28

Corporations are taxed on their income. When they pay dividends, that income is then taxed to the payee.

Fortunately dividend rates are only 15%.

Question 29

What is required for a C-corp to file an S-corp election?

Answer 29

< 100 eligible shareholders.

• Ownership is restricted to US citizens or residents, estates, certain trusts, charities
• Must be created under the laws of the US or any state.
• Insurance co’s, Domestic International Sales corps, and certain financial institutions cannot be S corps.
• The S Corp can only have 1 class of stock, although there can be voting and non-voting shares.

Question 30

Do S corps have double taxation of dividends?

Answer 30

No! S-corp income is taxed to the shareholders! When S-corp shareholders receive dividends they’ve already paid taxes on the income.

Question 31

If you work for an S-corp and are an owner in it, do you have to pay self-employment tax?

Answer 31

No.

Question 32

How are distributions from an S -corp taxed?

Answer 32

Like a partnership, they’re considered a return of basis.

Question 33

When can a corporation be a personal holding company?

Answer 33

60% of gross income is from dividends, rent, royalties.

50% of the stock is owned by 5 or fewer individuals.

Question 34

Does a sole proprietor pay SS taxes?

Answer 34

Yes

Question 35

If you’re expecting your entity to experience losses the first year, which should you choose?

Answer 35

S-Corp, because it protects assets, but also allows losses to offset ordinary income.