Exam 15: Entities Overview

Emmy would like to organize PRK as either an LLC or as a C corporation generating a 15 percent annual before-tax rate of return on a $100,000 investment. Individual ordinary rates are 25 percent, corporate rates are 15 percent, and individual capital gains and dividends tax rates are 5 percent. PRK will distribute its earnings annually to either its members or shareholders. a. Ignoring self-employment taxes, how much would Emmy keep after taxes if PRK is organized as either an LLC or as a C corporation? b. Ignoring self-employment taxes, what are the overall tax rates (combined entity and owner level) if PRK is organized as either an LLC or a corporation?

Which of the following is not an effective strategy for mitigating the double tax associated with C corporations?

Sole proprietors are subject to self-employment taxes on net income from their sole proprietorships.

Unincorporated entities with only one individual owner are taxed as sole proprietorships.

Robert is seeking additional capital to expand ABC Inc. In order to qualify ABC as an S corporation, which type of investor group should Robert obtain capital from?

Nancy purchased a building and then leased the building to ZML. Nancy is the sole shareholder of ZML. She leased the building to ZML for $2,500 per month. However, the IRS determined that the fair market value of the lease payment should only be $1,500 per month. How would the lease payment be treated with respect to both Nancy and ZML?

If an individual forms a sole proprietorship, which nontax factor will be of greatest benefit to the sole proprietor?

Tax rules require that entities be classified the same way for tax purposes as they are classified for legal purposes.

In certain circumstances, C corporations can elect to be treated as flow-through entities.

From a tax perspective, which entity choice is preferred when a liquidating distribution occurs and the entity has assets that have declined in value?

Rodger owns 100% of the shares in Trevor Inc., a C corporation. Assume the following for the current year: Trevor Inc.'s pre-tax income $= \$ 16,000$ Trevor Corp's marginal tax rate $= \mathbf { 3 5 \% }$ Percentage of after-tax earnings retained by Trevor Corp $= 0 \%$ (i.e., all after-tax earnings distributed) Rodger's dividend tax rate $= \mathbf { 5 } \%$ Given these assumptions, how much cash does Rodger have from the dividend after all taxes have been paid?

In its first year of existence, BYC Corporation (a C corporation) reported a loss for tax purposes of ($40,000). How much tax will BYC pay in year 2 if it reports taxable income from operations of $35,000 in year 2 before any loss carryovers?

A single-member LLC is taxed as a partnership.

Jerry would like to organize FBC as either an LLC or as a C corporation generating an 8 percent annual before-tax rate of return on a $400,000 investment. Individual and corporate tax rates are both 35 percent and individual capital gains and dividends tax rates are 15 percent. FBC will pay out its after-tax earnings every year to either its members or its shareholders. a. How much would Jerry keep after taxes if FBC is organized as either an LLC or as a C corporation (ignore self-employment taxes)? b. Ignoring self-employment taxes, what are the overall tax rates (combined owner and entity level) tax rates if FBC is organized as either an LLC or as a C corporation?

David would like to organize HOS as either an LLC or as a corporation generating a 12 percent annual before-tax return on a $300,000 investment. Individual and corporate tax rates are both 30 percent and individual capital gains and dividend tax rates are 15 percent. HOS will pay out its after-tax earnings every year to either its members or its shareholders. a. Ignoring self-employment taxes, how much would David keep after taxes if HOS is organized as either an LLC or a corporation? b. Ignoring self-employment taxes, what are the overall tax rates (combined owner and entity level) if HOS is organized as either an LLC or a corporation?

Losses from C corporations are never available to offset a shareholder's personal income.

Which legal entity is generally best suited for going public?

Which legal entity is correctly paired with the party that bears the ultimate responsibility for paying the legal entity's liabilities?

S corporations have more restrictive ownership requirements than other entities.

Limited partnerships are legally formed by filing a certificate of limited partnership with the state in which the partnership will be organized.