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What are the benefits/downfalls of being a corporation vspartnership vs sole proprietorship for tax and legal purposes?

If you create an LLC do you default to a partnership orcorporation for tax purposes? Can an LLC be both?

Do corporations and partnerships both pay tax?

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Tod Thiel
Tod ThielLv2
28 Sep 2019
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1. Dave and Cindy, who want to start a law firm, each have$1,000 to invest in the business and no personal assets and wantlimited liability protection and only 1 level of taxation. Theywant your advice on whether they should form their law firm as: 1)a general partnership; or 2) a limited liability corp (LLC) Whatbusiness entity would you recommend? Why?

2. Karen, who is setting up a new business, expects that her newbusiness’ income in the first year will be $10,000. If the businessis a C (regular) corporation assume it has distributed $5,000 ofits $10,000 income to Karen as a dividend. Corp’s income tax rateis 35%. Karen’s income tax rate is 30% and her dividend tax rate is20%. For federal income tax purposes, how much would be the incometaxes paid on her business’ projected income if Karen’s businesswas a C (regular) corporation or was a sole proprietorship?

1. Can shareholders of a C corporations deduct its lossesagainst corporation's E&P passed to its shareholders asdividends (i.e. income of shareholders)?

2. When can a C (regular) corporation's corporate veil bepierced resulting in its shareholders being personally liable forcorporation’s actions?

3. How is the income of the following business entitiestaxed?

•Sole proprietorship

•C (regular) corporation

•Partnership

•Limited liability corporation (LLC)

•S corporation

4. Kent and Craig, who want to start a horse-training business,spoke to an insurance agent about getting insurance to coverpotential liabilities, but were told that they could not getliability insurance because of the high risk nature their proposedbusiness. What business entities would you recommend to Kent andCraig? Why?

Please answer all the questions above.

Regulations are
A. equal in authorityto legislation if statutory
B. equal in authorityto legislation
C. presumed to bevalid and to have almost the same weight as the IRC
D. equal in authorityto legislation if interpretative
2) Which of the followingstatements regarding proposed regulations is not correct?
A. Practitioners andother interested parties may comment on proposed regulations.
B. Proposedregulations expire after 3 years.
C. Proposed andtemporary regulations are generally issued simultaneously.
D. Proposedregulations do not provide any insight into the IRS'sinterpretation of the tax law.
3) Identify which of thefollowing statements is false.
A. Members from boththe House and the Senate are on the Conference Committee.
B. When tax advisorsspeak of the tax law, they usually have in mind just the InternalRevenue Code.
C. Records ofcommittee hearings are helpful in determining Congressionalintent.
D. All arefalse.
4) Which of the followingstatements about a partnership is true?
A. Partners are taxedon distributions from a partnership.
B. A partnership is ataxpaying entity.
C. Partners are taxedon their allocable share of income whether it is distributed ornot.
D. Partners areconsidered employees of the partnership.
5) Which of the followingstatements is incorrect?
A. The number of Scorporation shareholders is unlimited.
B. S corporationsmust allocate income and expenses to their shareholders based ontheir proportionate ownership interest.
C. S corporationincome is taxed to shareholders when earned.
D. S corporationlosses can offset shareholder income from other sources.
6) Which of the followingstatements is incorrect?
A. Limited partners'liability for partnership debt is limited to their amount ofinvestment.
B. In a generalpartnership, all partners have unlimited liability for partnershipdebts.
C. In a limitedpartnership, all partners participate in managerialdecision-making.
D. All of thestatements are correct.
7) Three members form an LLC inthe current year. Which of the following statements is incorrect?
A. The LLC can electto have its default classification ignored.
B. The LLC's defaultclassification under the check-the-box rules is as apartnership.
C. The LLC can electto be taxed as a C corporation with no special taxconsequences.
D. If the LLC electsto use its default classification, it can elect to change itsstatus to being taxed as a C corporation beginning with the thirdtax year after the initial classification.
8) Identify which of thefollowing statements is false.
A. Under thecheck-the-box regulations, an LLC that has only two members(owners) must be taxed as a partnership.
B. The check-the-boxregulations permit an LLC to be taxed as a C corporation.
C. A business neednot be incorporated under state or federal law to be taxed as acorporation.
D. Once an electionis made to change its classification, an entity cannot change againfor 60 months.
9) Identify which of thefollowing statements is true.
A. The check-the-boxregulations permit an LLC to be taxed as a C corporation.
B. Under thecheck-the-box regulations, an LLC that has only two members(owners) default classification is as a partnership.
C. Once an electionis made to change its classification, an entity cannot change againfor 60 months.
D. All of thestatements are true.
10) For Sec. 351 purposes theterm property does not include
A. accountsreceivable
B. cash
C. inventory
D. servicesrendered
11) Identify which of thefollowing statements is true.
A. The exchange ofstock for services rendered is not a taxable transaction.
B. The repeal of Sec.351 would result in more existing businesses beingincorporated.
C. Section 351 wasenacted to allow taxpayers to incorporate without incurring adversetax consequences.
D. All arefalse.
12) Barry, Dan, and Edithtogether form a new corporation; Barry and Dan each contributeproperty in exchange for stock. Within 2 weeks after the formation,the corporation issues additional stock to Edith in exchange forproperty. Barry and Dan each hold 10,000 shares and Edith willreceive 9,000 shares. Which transactions will qualify fornonrecognition?
A. Only the secondtransaction will qualify for nonrecognition.
B. Only the firsttransaction will qualify for nonrecognition.
C. Because of thestep transaction doctrine neither transaction will qualify.
D. Both transactionswill qualify under Sec. 351 if they are part of the same plan ofincorporation.

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