Exam 12: The Choice of Business Entity

Bryan Houlberg expects his C corporation to generate a profit of $200,000.What is the effective tax rate on the $200,000 if net income after corporate tax is distributed to him as a dividend and his marginal tax rate on ordinary income is 37%?

Which of the following statements regarding the personal holding company tax is false?

Which of the following statements regarding the tax burden imposed on business entities is true?

Bryan Houlberg expects his C corporation to generate a profit of $200,000.What is Bryan's after-tax cash flow from the corporation if net income after corporate tax is distributed to him as a dividend and his marginal tax rate on ordinary income is 37%?

The accumulated earnings tax is assessed at the highest individual marginal tax rate on ordinary income.

Sandy,Sue,and Shane plan to open Friends,an upscale restaurant.They project that the business will incur a $90,000 operating loss in Year 1,and $75,000 of profit in Year 2.Which of the following statements is true?

One disadvantage of the creation of a family-owned entity is that there is dilution of control with respect to the original business owners.

Homer currently operates a successful S corporation.He would like to bring his two teenage children into the business.If he gives each child 10% of the stock,which of the following statements is true?

Gwen and Travis organized a new business as an LLC in which they own equal interests.The new business generated a $10,000 operating loss its first year.Travis has no other taxable income for the current year,but expects to have sufficient taxable income in future years to pay tax in the 24% tax bracket.Which of the following statements regarding Travis' tax savings from the current LLC loss is true?

After-tax cash flow from a passthrough entity will always exceed after-tax cash flow from a taxable corporation.

A family partnership can be used to shift a portion of the income from a capital-intensive manufacturing business to a taxpayer's young children.

Which of the following entities does not provide all the owners with limited liability for debts incurred by the entity?

Marcia is a shareholder in an S corporation and also works for the corporation.This year,her share of ordinary income was $250,000 and her compensation was $100,000.Which of the following accurately describes her tax consequences from these earnings?

A partner in a limited liability partnership (LLP)is protected from malpractice-related claims arising from the professional misconduct/negligence of another partner.

The three Crosby children intend to form a business.The business will borrow $900,000 from a local bank.Which of the following statements is true?

When a closely held business is formed as a regular corporation,earnings that are distributed to a shareholder-employee as dividends are taxed only once.

In today's tax environment,the opportunity for individuals to exploit the difference between the individual and the corporate rate structure is greater than ever.

The use of a corporation as a tax shelter is most effective when the individual tax rate is significantly higher than the corporate tax rate.

The accumulated earnings tax is imposed on a partnership formed for or availed of for the purpose of avoiding the income tax with respect to its owners by permitting earnings and profits to accumulate instead of being divided or distributed.

Which of the following statements regarding the accumulated earnings tax is true?