Intro to Choice of A Business Form Flashcards
What principle governs the taxation of income generated by property?
The owner of property is taxed on any income generated by that property
How is a sole proprietorship treated under state law?
State law does not treat the sole proprietorship as an entity that owns property separately from the individual entrepreneur
What is the legal status of a partnership under state law?
A partnership exists when two or more individuals engage collectively in an activity with the expectation of generating profits
What is a key characteristic of a partnership?
A partnership is a very flexible business form because it is a purely consensual arrangement
True or False: Each partner in a partnership is personally responsible for any partnership obligations.
True
What distinguishes a corporation from a partnership?
A corporation is a more rigid arrangement than a partnership
Who can create a corporation?
A single individual can create a corporation
What must be done for a corporation to be recognized as a legal entity?
The assets of the enterprise must be transferred to the corporation
What is the liability exposure of shareholders in a corporation?
Shareholders are not personally responsible for the obligations of the corporation
Fill in the blank: A limited liability company (LLC) is treated as a ______ from its individual owners.
legal entity separate
What is the maximum liability exposure of members in an LLC?
Members are exposed to obligations of the enterprise only to the extent of their investment in the LLC
How are corporations treated for tax purposes?
Corporations are treated as tax-paying entities
What are C Corporations?
Corporations treated as tax-paying entities identified by the tax law
What is the tax burden on C Corp income?
The income of a C corp is taxed twice
What did the 2003 tax changes do to the tax burden on dividends?
Reduced the tax burden on dividends, causing them to be taxed at lower rates than ordinary income
What is a pass-through entity?
Enterprises taxed as partnerships and S corporations, where income is taxed directly to the owners
What is the tax treatment for S Corporations?
Income of S Corporations is not normally subject to the corporate tax
True or False: Pass-through entities were generally favored before the 1980s.
False
What is the goal of tax integration?
To impose the same tax burden on the income of all businesses irrespective of their legal form
What are the economic costs of the current two-tier system of corporate taxation?
Reduces investment levels and interferes with efficient allocation of resources
What is one proposed goal for an integrated tax system?
Make more uniform the taxation of investment across sectors of the economy
What is a potential downside of integration proposals?
Lost tax revenue must be compensated by increasing other taxes or reducing government spending
