Chapter 31

Question 1

Sole proprietorship

Answer 1

A unincorporated business owned by one person it is not required to file a separate tax return because the business is a flow-through tax entity.

Question 2

What is a Corporation

Answer 2

A corporation has shareholders which are the owners who own the stock. The owners delegate who is on the board of directors who are in charge of managing the business.

Question 3

What is the biggest disadvantage a corporation has?

Answer 3

Has double taxation. Corporate income tax and shareholder tax dividends

Question 4

What is the biggest advantage of a corporation

Answer 4

It protects the owners from personal liability for the debts of the corporation and the actions of others, but no against liability for their own negligence.

Question 5

Limited Liability in a corporation

Answer 5

A corporation protects managers and investors from personal liability for the debts of the corporation and the actions of others, but not against liability for their own negligence (or other torts and crimes)

Question 6

What is a S corporation

Answer 6

Shareholders of S corps have both the limited liability of a corporation and the tax status of a partnership.

Question 7

What are the major restrictions of S Corps

Answer 7

1. There can be only one class of stock
2. There can be no more than 100 shareholders
3. Shareholders must be individuals, estates, charities, pension funds, or trusts, not partnerships or corporations
4. Shareholders must be citizens or residents of the United States, not nonresident aliens
5. All shareholders must agree that the company should be an S corp.

Question 8

Close corporations

Answer 8

A company whose stock is not publicly traded. Also known as a closely held corporations

Question 9

Limited Liability Companies (LLC)

Answer 9

An LLC offers the limited liability of a corporation and the tax status of a partnership. Income tax flows through the company to the individual members, avoiding the double taxation of a corporation.

Question 10

Partnership

Answer 10

A unincorporated association of two or more co-owners who operate a business for profit

Question 11

In a limited liability partnership the partners are not liable for the debts of the partnership.

Answer 11

They are however, liable for their own misdeeds, just as if they were a member of an LLC or a shareholder of a corporation

Question 12

Liability in partnerships

Answer 12

Limited partners are not personally liable but general partners are.

Question 13

Joint Venture

Answer 13

A partnership for a limited purpose

Question 14

Professional corporations

Answer 14

PC’s provide more liability protection than a general partnership

Question 15

Dissociation

Answer 15

When a partner quits on the partnership.

Question 16

Corporations have perpetual existence

Answer 16

meaning they can continue without their founders

Question 17

Piercing the Veil

Answer 17

If corporate shareholders do not comply with the technicalities of the law, they may be held personally liable for the debts of the corporation.

Question 18

LLC Vs. Corporation

Answer 18

The tax status of an LLC has a major advantage over a corporation. Although a S corporation has the same tax status as an LLC, it also has the annoying rules about classes of stock and number of shareholders.

Question 19

Venture capitalists almost always refuse to invest in LLC’s preferring C Corporations instead because of 4 reasons?

Answer 19

1. Arcane tax issues
2. C corporations are easier to merge, sell, or take public
3. Corporations can issue stock options
4. General legal uncertainty involving LLC’s

Question 20

Limited partners must have at least one limited partner and one general partner

Answer 20

yeah

Question 21

Under Federal Trade Commission rules a franchisor must deliver to a potential purchaser a so called franchise disclosure document at least 14 days before any contract is signed or money is paid. The FDD must provide info on:

Answer 21

1. The history of the franchisor and the executives
2. Litigation with franchises
3. Bankruptcy filings by the company and its officers and directors
4. Cost to buy and operate a franchise
5. Restrictions, if any, on suppliers, products, and customers.