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Nippon (Business and the Law) > Midterm Exam > Flashcards

Midterm Exam Flashcards

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1
Q

What is a closely held business?

A

In general it is a business whose ownership interests are not publicly traded on an established market

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2
Q

How many and how active are owners in a closely held business?

A

Usually has a much smaller number of owners who tend to take a more active role in the management and operation of the business

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3
Q

Are there more closely held businesses or publicly traded businesses?

A

Closely held businesses

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4
Q

What types of closely held business organizations exist?

A

General partnerships, the close corporation, the limited partnership, the LLP, and the LLC

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5
Q

What is a significant problem for closely held businesses that is largely absent in the publicly held setting?

A

closely held businesses lack a market for their ownership interests. Therefore, there is often a lack of an exit for investors who disagree with the majority will and who would prefer to “cash out” their investment

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6
Q

What is absent in a closely held business

A

disciplinary effect of the market

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7
Q

What is the Law of Agency?

A

the law governing the relationships between principles, agents, and third parties

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8
Q

What is the principle in relation to the Law of Agency?

A

the employer/proprietor

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9
Q

What is the agent in relation to the Law of Agency

A

the employee

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10
Q

What is a sole proprietorship?

A

a business owned by a single individual that is not operated as a corporation or other special legal form

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11
Q

What is the major disadvantage of the sole proprietorship?

A

The owner has unlimited personal liability for the obligations of the business.

Personal assets are at risk in lawsuits arising out of business activities

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12
Q

What is a major advantage of the sole proprietorship?

A

You can just start doing business… There is no need to file special documents with the state

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13
Q

What is a general partnership?

A

an association of two or more persons to carry on, as co-owners, a business for profit

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14
Q

How is the general partnership unique?

A

it can be informally created… so long as two or more persons are carrying on, as co-owners, a business for profit, a general partnership is created

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15
Q

How is the general partnership a rather unstable form of business form?

A

partners can easily exit the business. A partner’s withdrawal typically causes a buyout of the partner’s interest or the dissolution of the partnership itself

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16
Q

Do all partners in a general partnership have the right to participate in the management of the business?

A

Yes

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17
Q

What is a corporation?

A

under all corporation statutes, a corporation is viewed as a separate legal entity whose identity is distinct from that of its owners

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18
Q

What is a downside of the general partnership?

A

o Like the sole proprietorship however, the primary downside of a general partnership is that the law imposes unlimited personal liability on the partners for the obligations of the partnership

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19
Q

Do shareholders have rights to participate in the management of a corporation’s business?

A

Generally, NO

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20
Q

What is the most important benefit of a corporation?

A

it provides its shareholders with limited liability for the obligations of the business

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21
Q

How is the income of a corporation taxed?

A

It is taxed twice - once at the corporation level and a second time at the shareholder level

Corporation pays taxes on its income, and the shareholders pay taxes on that income again when (and if) the income is distributed to them

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22
Q

What is a state franchise tax?

A

taxes imposed for the privilege of organizing a business in a state

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23
Q

What is a limited partnership

A

a partnership comprised of two classes of partners - general and limited

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24
Q

What are the differences between a general and limited partner?

A

general partners have unlimited personal liability (like a general partnership) whereas limited partners have limited liability (like a corporation)

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25
Q

What is a limited liability partnership (LLP)?

A

a general partnership that, depending on the relevant statute, provides partners with limited liability for the partnership’s tort obligations or for both its tort and contract obligations

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26
Q

What is a limited liability limited partnership?

A

a limited partnership that provides LLP-like limited liability protection to some or all of the partners

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27
Q

What is a limited liability corporation?

A

a business org, formed by a required state filing, that adopts many of the best features of the corporation and partnership forms

Like a corporation, an LLC is a legal entity that is separate and distinct from its owners

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28
Q

What are the owners of an LLC known as?

A

members

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29
Q

How is an LLC similar to a partnership?

A

Like a partnership, an LLC is characterized by structural flexibility, restricted transferability of ownership interests, and pass-through taxation

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30
Q

What is a professional corporation (PC) and professional association (PA)

A

hybrid entities that allow professionals, such as lawyers, accountants, and doctors, to practice in a corporate or corporate-like form.

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31
Q

What is a business trust?

A

an organization that derives from the conventional common law trust. While once broadly popular, business trusts are now used in a few specialized areas rather than for the operation of businesses generally

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32
Q

As a general rule, what kind of entity is a corporation treated as?

A

taxpaying entity

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33
Q

What type of entity are most state law partnerships and limited liability companies treated as?

A

accounting entity

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34
Q

What is a C Corporation?

A

Corporation treated as a taxpaying entity

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35
Q

What is an S corporation?

A

Corporation treated as an accounting entity

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36
Q

What type of corporation is more common, S or C?

A

S Corporations

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37
Q

How often are C corporations taxed?

A

Twice

C corporations have to pay the 21% corporate tax

The individual income tax is imposed on C corporation income, but not until the corporation distributes its earnings to its shareholders (pays dividends)

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38
Q

What is the tax paid on dividends?

A

23.8%

Generally taxed at the maximum capital gains rate of 20% and there is a 3.8% Medicare contribution tax rate

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39
Q

What is a pass-through-entity?

A

partnership and S corporations

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40
Q

Are pass-through-entities subject to the corporate tax or any other entity-level tax?

A

No - instead, the income of a pass through entity is taxed immediately to the owners of the enterprise

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41
Q

Is the passed-through-entity or the C corporation more favored?

A

passed-through-entity is now generally favored over the C corporation at all stages of the business life cycle

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42
Q

what is integration?

A

the process of adopting a tax system that imposes the same tax burden on the income of a business, irrespective of the legal form in which the business is conducted

This would mean repealing the corporate tax and taxing corporate income directly to the corporation’s shareholders when it is earned (at their individual tax rate)

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43
Q

4 goals for the integration of the tax system

A

Make the taxation of investment more uniform

Make the taxation of returns earned on debt and equity more uniform

Distort as little as possible the choice between retaining and distributing earnings

Create a system that taxes capital income once

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44
Q

What is the shareholder allocation prototype?

A

a type of integration which would allocate a corporation’s income among its shareholders as the income is earned. each shareholder would include the amount of corporate income allocated to the shareholder in the shareholder’s gross income. When the corporation distributes its earnings to its shareholders, the distributions would normally be tax-free to the shareholders

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45
Q

What are the 3 ways a corporate can effectuate an acquisition?

A

Asset Transfer
Stock Transfer
Merger

46
Q

What is an asset transfer?

A

Acquire everything that’s inside the target corporation (identify all property in the target and physically transfer all its assets). They would actually have to convey every piece of property

47
Q

What is a stock transfer?

A

Instead of dealing with the target corporation, the acquirer can deal directly with the shareholders where they transfer all of their stock to the acquiring corporation

48
Q

What is a merger?

A

Acquiring Corp can enter into an agreement with shareholders where target will transfer into acquirer by operation of law. There is no physical transfer of deeds but by virtue of state laws the companies merge together.

49
Q

What are the tax consequence when the Acquirer buys Target with cash?

A

There is an immediate tax of 35%

50
Q

What are the tax consequence when the Acquirer buys Target’s stock?

A

You can typically avoid a tax if you comply with certain statutory rules

51
Q

What are the downsides of an acquisition by asset transfer?

A

Acquirer gets all the liabilities of Target

52
Q

What are the 2 steps of the stock transfer fiction?

A

1 - Target’s shareholders sell their stock to Acquirer

2 - Target distributes its assets to Acquirer

The stock transfer fiction results in no tax to Target and no change in the basis of Target’s assets

53
Q

What are the 2 steps of the asset transfer fiction?

A

1 - Target sells all its assets to Acquirer

2 - Target distributes the consideration received from Acquirer to its shareholders

The asset transfer fiction taxes Target on the gain in its assets and increases the basis of those assets by a like amount

54
Q

What are 6 common estate planning objectives

A

To identify who gets what, when, and under what circumstances

To name fiduciaries who administer assets and make various decisions

To avoid probate (post-death) and guardianship (during life)

Asset protection

Business succession planning

Minimization of transfer taxes

55
Q

What are the 4 core estate planning documents?

A

Will
Revocable Trust
Power of Attorney for Healthcare
Power of Attorney for Property

56
Q

What is Power of Attorney for Health Care?

A

Allows you to designatre a person to make healthcare decisions for you if you cannot make them yourself

This document also allows you to make a “living will” and provide specific directions about life-sustaining treatment

This avoids the need to petition the court to appoint a guardian to make medical decisions

57
Q

What is Power of Attorney for Property?

A

Allows you to designate an agent to act on your behalf on a limited or broad basis regarding your property interests (tangible and intangible property, legal claims, taxation matters)

This avoids the need to petition the court to appoint a guardian/conservator to make financial decisions if you are unable to make them yourself

58
Q

What is a decent?

A

an individual who has died

59
Q

What is an executor

A

individual that manages and distributes the decedent’s property

60
Q

What is intestacy?

A

if you fail to execute a valid will during life

61
Q

What is probate?

A

the process by which a court supervises the administration of a decedent’s probate property, whether or not the decedent executed a valid will

Probate administration is typically independent, meaning that court involvement is minimal

62
Q

What does a will do?

A

a legal document that does:

Provides for the disposition of property held in the name of the decedent individually (not held by a trustee of a revocable trust or other trust)

Nominates an executor to handle a decedent’s affairs, including payment of debts and taxes, and locating and safeguarding assets

May name guardians for minor children

63
Q

What are the general requirements of a will?

A

varies state by state, but usually a will must be in writing, signed by the testator in the presence of witnesses

64
Q

Is a will the main estate planning document?

A

commonly thought of as the main estate planning document but is more commonly used as a simple “pour over” into a revocable trust document

65
Q

Under IL law, what happens during intestacy if the decedent has a spouse and descendants?

A

decedent’s estate would be distributed 1/2 to spouse 1/2 to descendants

66
Q

Under IL law, what happens during intestacy if the decedent has a spouse but no descendants?

A

Entire estate is distributed to spouse

67
Q

Under IL law, what happens during intestacy if the decedent has no spouse but AT LEAST one descendant?

A

Estate is distributed “per stirpes” (equally) among descendants

68
Q

Under IL law, what happens during intestacy if the decedent had neither a spouse nor any descendants

A

Estate would be distributed equally among decedent’s parents and siblings

(if one parent were deceased, then the surviving parent would receive a double portion and if a sibling were deceased, the sibling’s descendants would receive the deceased sibling’s share)

69
Q

Under IL, what happens during intestacy if the decedent didn’t have a spouse, descendants, parents or siblings

A

estate would be distributed 1/2 to the decedent’s maternal grandparents (and their descendant per stirpes)

1/2 to the decedent’s paternal grandparents (and their descendants per stirpes)

70
Q

What does Per Stirpes mean?

A

Latin for “by roots” - method of dividing property whereby the descendants of a deceased person take the share their deceased ancestor would have received if living

71
Q

What are the responsibilities of an executor?

A

File decedent’s will with probate court

Notify decedent’s heirs and legatees

Provide notice to creditors

Gather decedent’s assets (appraisal of assets)

Pay decedent’s final debt and expenses

Transfer title of decedent’s property to beneficiaries

Pay expenses of administration

72
Q

What is a grantor or settlor in relation to a trust?

A

creator of a trust

73
Q

What is a donor?

A

anyone who makes a gift to a trust (or to an individual)

74
Q

What is a trustee?

A

individual that holds title to the trust property and administers the trust

75
Q

The person or person for whose benefit the trustee holds the trust property are called?

A

beneficiary or beneficiaries

76
Q

What is a current beneficiaries v. remainder beneficiaries?

A

Current beneficiaries may receive distributions from the trust now

Remainder beneficiaries will not receive distributions from the trust until later, often when the trust terminates or when a senior-generation beneficiary has died

77
Q

What is an inter vivos trust v. testamentary trust?

A

intervivos trust is one that is established during the grantor’s life

testamentary trust - one that is established at the time of the grantor’s death by the grantor’s will

78
Q

What is an irrevocable trust?

A

When the grantor cannot amend or revoke the trust

79
Q

What is a revocable trust?

A

a legal relationship between a grantor/settlor and a trustee regarding the administration of property

80
Q

What is a grantor trust?

A

A trust where the grantor/settlor is treated as owning the trust property for federal income tax purposes

May be revocable or irrevocable

81
Q

What are Powers of Appointment?

A

powers which can be given to another person (typically a beneficiary) to determine the ultimate takers of property from a defined group of permissible takers

82
Q

When can a revocable trust be funded?

A

life or death

life: often funded with all or substantially all of a grantor’s assets during lifetime in order to avoid probate
death: typically funded by a “pour over” will which distributes all property to the trust

83
Q

What is a generation-skipping-transfer tax

A

tax on all transfers that skip over members of one younger generation to a still younger one

84
Q

what is the current estate tax exemption?

A

11.8 million and 22 million for spouses

85
Q

What is the IL Estate Tax?

A

IL has a $4 million estate tax exemption (no gift tax, but lifetime gifts are factored into calculation)

86
Q

What is an Outright Gift?

A

gifts of property made directly to family members (or to a trust for their benefit) during life

87
Q

What is a Credit Shelter Trust?

A

This trust is created upon the decedent’s death pursuant to the terms of the decedent’s revocable trust

It makes use of the applicable federal estate tax exemption amount of the first spouse to die

On the death of the first spouse, assets in the amount equal to the first spouse’s remaining estate tax exemption is placed into trust for the surviving spouse and/or descendants

88
Q

What are the sources of Federal Tax Law?

A

Internal Revenue Code

United States Constitution

Treasury Regulations

IRS Materials

89
Q

What is income?

A

gross income can generally be said to encompass any economic benefit that increases the taxpayer’s wealth, unless the Code specifically excludes the item from gross income

90
Q

What is return of capital?

A

When an individual receives a return of his money

91
Q

What happens when an apartment increases in value? Are you taxed on this increase in value?

A

No - not until you sell the home… Known as a realization event

92
Q

What is a realization event?

A

Event in which you are taxed on the increases in property value when it is sold or exchanged

93
Q

Heather purchases a home for 200k and then sells it for 300k. What is Heather’s basis in the home? What amount is she taxed on?

A

Basis is 200k (what she bought it for/the cost)

She is taxed 100k (difference between sale price and basis)

94
Q

What kind of interest payments can be deducted from your gross income?

A

Interest payments incurred in trade or business activities or investment activities may be deducted by the taxpayer

Interest paid for money borrowed for personal use generally cannot be deducted by the taxpayer (car loans/CC debt)

95
Q

what is an annual tax on the value of real property?

A

real estate tax

96
Q

What is secured debt?

A

1 - makes your ownership in a qualified home security for payment of the debt

2 - provides, in case of default, that your home could satisfy the debt

3 - record or is otherwise perfected under any state or local law that applies

i.e = your loan is a secured debt if you put your home up as collateral to protect the interests of the lender

97
Q

What is home acquisition debt?

A

loan taken out to buy, build, or substantially improve a qualified home (main or 2nd). It also must be secured by that home

98
Q

What is the home acquisition debt limit?

A

750k

99
Q

if you sell your home at a significant profit and the home you sold counts as your main home, how much of the gains are not taxable?

A

First 250k

500k if married and filing jointly

100
Q

What is the Eligibility Test for determining if your home qualifies for certain tax breaks when you sell it?

A

Sale qualifies for exclusion of 250k gain (500k if married filling jointly) if you owned the home and used it as your main home during at least 2 of the last 5 years before the date of sale

101
Q

How do you determine if a home is an individual’s main home?

A

there is a “facts and circumstances” test - most important factor is where your spend the most time

102
Q

How do improvements and repairs affect a home’s basis

A

Improvements materially add to the value of your home. You cannot deduct these costs.

Repairs do not add value to your home

103
Q

What does a Taxable Asset Transfer look like?

A

See drawing

104
Q

What does a “C” reorganization look like?

A

See drawing

105
Q

What does a Triangular “C” reorganization look like?

A

See drawing

106
Q

What does a Taxable Stock Transfer look like?

A

See drawing

107
Q

What does a B organization look like?

A

See drawing

108
Q

What does a Triangular “B” Reorganization look like?

A

See drawing

109
Q

What does a Taxable merger look like?

A

See drawing

110
Q

What does a Forward Triangular “A” Reorganization look like?

A

See drawing

Nippon (Business and the Law) (1 decks)

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