Chapter 9 Part 5

Question 1

In order to receive the full tax advantages, an FLP must have a

Answer 1

legitimate business purpose and profit motive. Someone contemplating establishing a family limited partnership needs the services of an attorney or estate tax specialist to ensure that the partnership is set up properly

Question 2

The main advantage of incorporation for business owners is that they are

Answer 2

“not personally responsible for the corporation’s debts. Continuity of life is another advantage-unlike a partnership, a corporation continues to exist if one of the owners
(shareholders) dies or retires from the business. Other advantages of the corporate structure include a centralized management structure and interests that are freely transferable. Incorporating is a fairly simple matter. In most states, the applicant must file certain documents with the Secretary of State and must pay a fee”

Question 3

corporate resolution

Answer 3

will identify the individual(s) authorized to act on behalf of the corporation

Question 4

C Corporation

Answer 4

A corporation that may have an unlimited number of shareholders and that is subject to regular corporate taxation is called a C Corporation (after Subchapter C of the Internal revenue Code). C Corporations are required to pay corporate taxes on income, while their shareholders (owners) must pay personal income laxes on any profits they receive in the form of cash dividends. This double taxation is one of the main disadvantages of a C Corporation. Also, the management structure is often more complex than that of a partnership

Question 5

S Corporation

Answer 5

elect to be taxed like partnerships under Subchapter S of the Internal revenue Code are known as S Corporations. In order to qualify as an S Corporation, a company must meet the following requirements: There may be no more than 100 shareholders; All shareholders must be U.S. citizens or resident aliens; The shareholders must all be individuals, estates, or certain types of trusts; It must be a domestic corporation; It may not be part of an affiliated group of corporations; It may have only one class of stock outstanding.

Question 6

S Corporations avoid corporate taxation by electing to

Answer 6

pass corporate income, losses, deductions, and credits through to their shareholders for federal tax purposes. Therefore, shareholders of S Corporations report the flow-through of income and losses on their personal tax returns and are assessed tax at their individual income tax rates. However, under state law, there is no difference between the tax treatment afforded S Corporations and any other type of corporation

Question 7

Limited liability companies (LLCs)

Answer 7

owners of limited liability companies are not personally liable for the companies’ debts. The advantage of an LLC is that the IRS treats these companies like a partnership for tax purposes. An LLC passes through both income and losses to its owners (called members). Income received by the owners will only be taxed at their individual tax rates. A limited liability company also has a more flexible management structure than a corporation and is easier to set up.

Question 8

The disadvantages of an LLC are that it does not have

Answer 8

continuity of life as with a C Corporation, and the interests may not be transferred freely

Question 9

Cash accounts require that clients

Answer 9

pay for all securities trades in full. Under Federal Reserve Board rules, this payment is due within five business days but more restrictive industry rules typically request clients pay by the settlement date. For stock trades, this is typically three business days following the trade date

Question 10

A margin account allows individuals to increase their purchasing power by

Answer 10

borrowing cash or securities from a broker-dealer. This type of account is used by investors who are seeking to multiply profits by using funds or securities borrowed from their broker-dealers

Question 11

Payment deadlines for margin trades are similar to the payment deadlines for trades in a cash account. the major difference is that the margin trade

Answer 11

does not need to be paid for in full. In a margin account, the Regulation T (Reg. T) requirement will determine how much money the client is required to deposit. For stock trades, Reg. T typically requires a client to deposit 50% of the purchase price

Question 12

The downside to using financial leverage is that

Answer 12

future deposits may be required if the account value falls below the minimums set by the regulators