LLC or Corporation? Course Instructions and Final Examination LLC or Corporation? Choose the Right Form for Your Business 7th Edition Anthony Mancuso CPE Edition Distributed by The CPE Store www.cpestore.com 1-800-910-2755 The CPE Store 819 Village Square Drive Tomball, TX 77375 1-800-910-2755
LLC or Corporation? Table of Contents Page Course Objectives... 3 Course Instructions... 4 Final Examination... 7
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Course Objectives After completing this course, you will be able to: Identify a situation in which a husband and wife must file a partnership return for their unincorporated small business Determine which form a sole proprietor uses to determine his or her liability for self-employment taxes Recognize which business structure is the riskiest to operate Spot the term which refers to an LLC that is managed by the owners Calculate the income tax liability for a C corporation that has taxable income of $60,000 Identify the party most likely to be the general partner in a large limited partnership Select, from a list, an accurate statement regarding S corporation profits and losses Identify a type of business likely to benefit from organizing as a Series LLC Pinpoint the party or person that would potentially have personal liability for entity debt Identify something that should be a top priority for all businesses Recognize the non-corporate structure which has fallen out of favor with entrepreneurs Identify a type of business that is not required to have an EIN when filing its income tax return Determine who or what resolves a situation in which partners cannot agree on a business issue, and no written partnership exists Recognize the determining factor in deciding when it is time to form an LLC Pinpoint who is entitled to bring in an outsider to run a business Spot a basic step in forming a corporation in all states Identify the quickest turnaround time when filing online for corporate articles of incorporation Ascertain which amount the owners report and pay income taxes on if a pass-through entity does not distribute all of its taxable earnings Determine the result of a decrease in the tax basis of an LLC co-owner Identify the amount of earnings a C corporation may retain Recognize the business type unable to change its tax classification by filing Form 8832 Select the tax rate typically used to calculate a partner s payment under a distribution clause Spot the item which is added back when calculating a corporation s earnings and profits Identify the article which allows an owner to sell his or her shares back to a corporation and have the transaction treated as an exchange Determine the best business structure for two co-owners who want personal liability protection, passthrough tax treatment, and desire to add passive investors Recognize the best alternative for a growing business that wants to raise additional capital and entice employees away from competitors Determine which form of business should be considered in order to alleviate personal liability concerns when a sole proprietor adds a second owner to the business Recognize the type of interest which should be issued to an incoming partner who will provide future services Identify the Revenue Ruling which provides information regarding the tax results of converting a oneowner business to a two-owner business Recognize a situation in which an EIN would be required Identify the form or schedule number that corresponds with the U.S. Return of Partnership Income Determine which IRC section applies to the tax-free treatment of incorporating a sole proprietorship Select the term which refers to property received by a shareholder other than shares of stock during incorporation Determine what will occur if Partner A transfers his or her entire interest to new Partner C, if Partner A owns a 60% interest and Partner B owns a 40% interest Ascertain what is gained by limited partners gain if their limited partnership is converted to an LLC Identify a situation in which personal liability for an LLC member could be created Pinpoint a typical consequence of converting a partnership to an LLC Recognize a potential tax trap for general partners after conversion to an LLC Select the most common reason why partnerships incorporate Determine what is available in some states that streamlines the conversion of a partnership to a corporation Spot the primary benefit of electing Subchapter S status Recognize why the corporate structure is often more suitable for larger businesses than an LLC Identify the category of partnership-to-corporation conversions that matches the steps provided in Revenue Ruling 2004-59 Determine the federal tax consequence if the owner of a one-member LLC dissolves the LLC and continues the business as a sole proprietor Recognize the reason LLC-to-partnership conversions are uncommon Identify an entity that can be a Subchapter S corporation shareholder - 3 -
Determine how long an S corporation must wait to reelect S corporation status after revoking its election Recognize who is typically subject to taxes when a corporation dissolves Discern why buyers typically desire a stepped-up basis in the purchased assets when acquiring a corporation Spot the cash-to-stock ratio in which the IRS deems a buying corporation can pay to the shareholders of the selling corporation in a Type A tax-free reorganization Identify the term for income that is earned and taxable within a state Recognize the act which could force you to defend a lawsuit in another state if your company doesn t have to qualify to do business in that state Recognize an example of an intrastate activity in another state Determine a result of a state s closed-door statutes Ascertain how an LLC typically avoids double taxation of profits earned in another state Select the term which refers to a state s ability to bind you by its decision Pinpoint something that is included in a contract to set out where a case can be filed Identify the term for the state tax which is owed on property purchased out-of-state and used within the state Determine why a company would be required to appear in an out-of-state court Course Instructions To fully benefit from this course, please follow all of the steps below. 1. Read each chapter in the text to get a good understanding of the material. 2. Answer the study guide problems which appear at the end of each chapter. After answering the problems, compare your answers with the correct answers to ensure that you understand the material. 3. When you feel that you have a good understanding of the material contained in the chapter, answer the questions on the final examination. 4. When you have completed the final examination, record your answers on the answer sheet provided and submit it for grading. A score of 70% or better is required to pass. Please also complete the course evaluation and submit it to us along with your answer sheet. Upon passing you will receive a Certificate of Completion stating that you have successfully completed the course and earned the continuing education credit. Prerequisites and Advance Preparation No prerequisites or advance preparation are required for this course. CPE Credit This course is recommended for 12 CPE credits. Final Exam Grading Online: By Mail: By Fax: Our fastest option, with instant results. Simply go to www.cpestore.com and click the link for online grading. Just follow the instructions from there. When you finish entering your answers, you ll receive instant test results and a Certificate of Completion to print. Mail your test and course evaluation to us. We grade the tests the day we receive them and mail the results and Certificate of Completion to you the following business day. Just fax your answer sheet to 1-281-255-4337. If you need us to fax the Certificate of Completion back to you, please provide us with your fax number and write please fax back on your answer sheet. If you don t need the Certificate faxed back, please write no fax needed on your answer sheet. - 4 -
Refunds The CPE Store guarantees your satisfaction. If, for any reason, you are not completely satisfied with your purchase, return it to us unused within 30 days for a prompt refund, no questions asked. (Sorry, but shipping fees are not refundable.) Customer Service The CPE Store holds itself to the highest standards. If we have not met your expectations, something is missing, or you just have a question please contact us at 1-800-910-2755 or customerservice@cpestore.com. About Our Courses The CPE Store s courses are developed to satisfy the continuing education requirements of the American Institute of Certified Public Accountants, each state s Board of Accountancy and the National Association of State Boards of Accountancy (NASBA). If your state requires registration of sponsors, our sponsor number will appear on your Certificate of Completion. Our courses are designed to meet the continuing education requirements of accounting professionals. A great deal of care has been taken to ensure that the course material is both interesting and relevant to the practice of accounting. The information presented is, to the best of our knowledge, current and accurate. However, The CPE Store is not in the business of rendering legal, accounting or other professional advice and as such, the material presented in our courses is intended as an overview. If legal advice or other expert assistance is required, the services of a competent professional should be sought. - 5 -
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LLC or Corporation? 12-Credit Course Final Examination A score of 70% or higher is required to pass the exam. If you score less than 70% on your first attempt, we will allow you to take the test a second time. Chapter 1 Business Entry Basics 1. In which situation must a husband and wife file a partnership return for their unincorporated small business? A. One spouse runs the business and the other is an employee B. They both manage the business and reside in a community property state C. The spouses elect to divide the profits and report them separately D. They both work in the business and share profits and losses 2. Where does a sole proprietor determine his or her liability for self-employment taxes? A. Schedule C B. Schedule SE C. Schedule A D. Form 1065 3. Which business structure is the riskiest to operate? A. LLC B. Limited partnership C. General partnership D. S corporation 4. What term refers to an LLC that is managed by the owners? A. Partner-management B. Manager-management C. Owner-management D. Member-management 5. If a C corporation has taxable income of $60,000, what is its income tax liability? A. $10,000 B. $15,000 C. $19,000 D. $21,000 6. Which of the following is likely to be the general partner in a large limited partnership? A. Entity managers B. A general partnership C. An LLC D. An investment firm 7. Which statement is accurate about S corporation profits and losses? A. They must be allocated in accordance with shareholder interest percentages B. Owners are taxed on distributed amounts but not retained earnings C. They may be allocated disproportionately to owners interest percentages D. They are taxed at the owners capital gains rates 8. Which type of business would likely benefit from organizing as a Series LLC? A. Professional services B. Real estate C. Manufacturer D. Retail chain - 7 -
Final Exam Chapter 2 Personal Liability Concerns 9. Which of the following would potentially have personal liability for entity debt? A. LLC owner B. Limited partner C. General partner D. Corporate shareholder 10. What should be a top priority for all businesses? A. Business insurance B. Operating agreements C. Paying taxes D. Retaining an attorney 11. Which noncorporate structure has fallen out of favor with entrepreneurs? A. S corporation B. LLC C. Corporation D. Limited partnership Chapter 3 Forming and Running Your Business 12. Which of the following is typically not required to have an EIN when filing its income tax return? A. Partnership B. Sole proprietor without a retirement plan C. Co-owned LLC D. S corporation 13. If partners cannot agree on a business issue, and no written partnership agreement exists, which of the following usually settles the issue? A. Arbitrator B. Attorney C. Court D. State default provision 14. Which factor determines when it is time to form an LLC? A. State requirements B. Size of the business C. Owner s decision D. Business income 15. Which entity may bring in an outsider to run the business? A. Member-managed LLC B. Manager-managed LLC C. Sole proprietorship D. General partnership 16. What is a basic step in forming a corporation in all states? A. Designate two separate people as officers B. Issue both common and preferred shares C. Obtain business insurance D. Prepare bylaws explaining duties and responsibilities 17. What is the quickest turnaround time when filing online for corporate articles of incorporation? A. Same day B. Two weeks C. Few days D. One week - 8 -
Final Exam Chapter 4 Money Issues: Taxes, Profits, Losses, and Investments 18. If a pass-through entity has taxable earnings of $75,000 and it distributes only $65,000, on what amount do the owners report and pay income taxes? A. $10,000 B. $75,000 C. $65,000 D. Cannot be determined 19. Which scenario results in a decrease in the tax basis of an LLC co-owner? A. Increase in LLC debt B. Contribution of property by the owner C. Profit allocation to the owner D. Distribution of cash to the owner 20. What is the maximum amount of earnings a C corporation may retain in the business? A. Any amount if justified by a valid business purpose B. $150,000 C. $250,000 D. Any amount regardless of reason 21. Which of the following might not be able to change it tax classification by filing Form 8832? A. Co-owned LLC B. Sole proprietorship C. Single-owner LLC D. Partnership 22. Which tax rate is typically used to calculate a partner s payment under a distribution clause? A. Highest B. Progressive C. Marginal D. Effective 23. What item is added back when calculating a corporation s earnings and profits? A. State sales taxes B. Federal income taxes C. Officers salaries D. Accelerated depreciation 24. What allows an owner to sell his or her shares back to a corporation and have the transaction treated as an exchange? A. Special voting rights B. Buy-back clause C. Redemption provision D. Convertible preferred rights Chapter 5 Choosing the Right Business Entity: Real Life Stories 25. If two co-owners want personal liability protection, pass-through tax treatment, and desire to add passive investors, which of the following is typically the right choice? A. Limited partnership B. Member-managed LLC C. General partnership D. Manager-managed LLC 26. If a growing business wants to raise additional capital and entice employees away from competitors, what is likely the best alternative? A. C corporation B. LLC C. S corporation D. Limited partnership - 9 -
Final Exam Chapter 6 Converting a Sole Proprietorship to Another Entity 27. When a sole proprietor adds a second owner to the business, which form of business should be considered in order to alleviate personal liability concerns? A. Limited partnership B. Registered limited liability partnership C. General partnership D. LLC 28. In order to avoid triggering immediate taxation, what type of interest should not be used for an incoming partner who will provide future services? A. Passive interest B. Profits interest C. Capital interest D. Limited interest 29. Which of the following provides information about the tax results of converting a one-owner business to a twoowner business? A. Revenue Ruling 99-5 B. Revenue Ruling 95-37 C. Revenue Ruling 2004-59 D. Revenue Ruling 84-52 30. In which case would an EIN be required? A. Sole proprietorship converts to a single-owner LLC B. Sole proprietorship begins doing business C Sole proprietorship converts to a co-owned LLC D. One-owner LLC creates an operating agreement 31. Which of the following is the U.S. Return of Partnership Income? A. Schedule K-1 B. Form 1120 C. Schedule C D. Form 1065 32. Which IRC section applies to the tax-free treatment of incorporating a sole proprietorship? A. Section 721 B. Section 1244 C. Section 351 D. Section 708 33. Which term refers to property received by a shareholder other than shares of stock during incorporation? A. Boot B. Equity C. Dividend D. Contributed capital Chapter 7 Converting a Partnership to Another Entity 34. If Partner A owns a 60% interest and Partner B owns a 40% interest, what occurs if Partner A transfers his or her entire interest to new Partner C? A. Taxable transaction to Partner C B. Tax termination of the partnership C. Formal dissolution of the partnership D. Conversion to a sole proprietorship 35. What do limited partners gain if their limited partnership is converted to an LLC? A. Manager-management structure B. Immediate tax savings C. Pass-through tax treatment D. Participation in management - 10 -
Final Exam 36. Which of the following is most likely to create personal liability for an LLC member? A. Capital contribution B. Deficiency make-up C. Adding additional LLC members D. Special allocation 37. Which of the following is a typical consequence of converting a partnership to an LLC? A. No immediate tax consequences B. A taxable sale or exchange C. Owners capital ratios are revised D. Owners no longer report business profits and losses on their individual tax returns 38. What is a potential tax trap for general partners after conversion to an LLC? A. New tax elections B. Change in partnership interest percentages C. Profits increase so personal taxes will decrease D. Allocation of liabilities 39. What is the most common reason why partnerships incorporate? A. Additional sources of capital B. Tax-free perks C. Income splitting D. Equity-based employee plans 40. What is available in some states that streamlines the conversion of a partnership to a corporation? A. Special bills of sale to formally transfer assets B. Automatic creditor notices of incorporation C. Articles of conversion D. Complimentary articles of incorporation filing 41. What is the primary benefit of electing Subchapter S status? A. Personal liability protection B. Pass-through tax treatment C. Multiple classes of stock D. Allocated profits are subject to FICA but not self-employment tax Chapter 8 Converting an LLC to Another Entity 42. Why is the corporate structure often more suitable than an LLC for larger businesses? A. It allows special classes of stock B. It provides equity-based employee plans C. It allows for separate management, supervisory, and investment roles D. None of the above 43. Which category of partnership-to-corporation conversion matches the steps provided in Revenue Ruling 2004-59? A. Interests-Over B. Assets-Over C. Automatic D. Assets-Up 44. If a corporation has accumulated negative E&P of $50,000 at the beginning of the year, and has current positive E&P of $20,000, how is a $30,000 distribution to its sole shareholder treated if he or she has a tax basis of $15,000? A. $20,000 dividend and $10,000 return of capital B. $30,000 dividend C. $10,000 return of capital and $20,000 capital gain D. $20,000 dividend and $10,000 capital gain - 11 -
Final Exam 45. If the owner of a one-member LLC dissolves the LLC and continues the business as a sole proprietor, which of the following is a federal tax consequence? A. Profits and losses are no longer reported on Schedule C B. LLC retained earnings are immediately taxable C. Taxable to the extent fair market value of assets exceeds the owner s basis D. No federal tax consequences 46. Why are LLC-to-partnership conversions uncommon? A. Owners tax concerns about the transfer of assets B. Owners give up legal liability protection C. New investors are unfamiliar with partnership tax rules D. Securities law complications Chapter 9 Converting, Dissolving, and Selling a Corporation 47. Which of the following can be a Subchapter S corporation shareholder? A. Husband and wife who are U.S. citizens B. Canadian citizen C. Corporation D. LLC 48. If an S corporation revokes its election, how long must it wait to re-elect S corporation status? A. 1 year B. 10 years C. 3 years D. 5 years 49. Who is typically subject to taxes when a corporation dissolves? A. Corporation only B. No tax impact on liquidation C. Corporation and shareholders D. Shareholders only 50. When acquiring a corporation, why do buyers typically desire a stepped-up basis in the purchased assets? A. Higher basis when assets are subsequently sold B. Larger amounts of future tax depreciation C. Avoids allocations to goodwill D. Avoids recording fair market values of assets 51. Which cash-to-stock ratio has the IRS said a buying corporation can pay to the shareholders of the selling corporation in a Type A tax-free reorganization? A. 65% cash/35% stock B. 75% cash/25% stock C. 50% cash/50% stock D. 60% cash/40% stock Chapter 10 Doing Business Out of State 52. What term is used for income that is earned and taxable within a state? A. Apportioned B. Allocated C. Jurisdictional D. Assigned 53. If your company doesn t have to qualify to do business in another state, which of the following would be most likely to force you to defend a lawsuit in that state? A. Subpoena B. Threat to reputation C. Long-arm statute D. Lack of personal jurisdiction - 12 -
Final Exam 54. What is one example of an intrastate activity in another state? A. Selling through independent contractors B. Engaging in an isolated transaction completed within 30 days C. Holding a board of director s meeting D. Providing services not incidental to an interstate sale 55. Which of the following is a result of a state s closed-door statutes? A. Dismissal of your company s lawsuit B. Forced qualification C. Invalidated contracts D. Loss of entitlement to defend yourself in a lawsuit 56. How does an LLC typically avoid double taxation of profits earned in another state? A. Claim a tax credit in the state where the income was earned B. Report the income only in the state where it was earned C. Reside in a state that doesn t impose an income tax D. Claim a tax credit in its home state 57. What refers to a state s ability to bind you by its decision? A. Long-arm statute B. Constitutional standard C. Personal jurisdiction D. Enforceable judgment 58. What would be included in a contract to set out where a case can be filed? A. Contract of adhesion B. Forum-selection provision C. Governing law provision D. Choice of law provision 59. Which state tax is owed on property purchased out of state and used within the state? A. Income tax B. Use tax C. Sales and use tax D. Sales tax 60. Other than an Internet company s minimum contacts, what other situation would require the company to appear in an out-of-state court? A. Causing an injury B. Interaction between the company and the forum state C. Sufficient business contracts D. Active conduct of business Thank you for taking our course. We hope you enjoyed it. - 13 -
LLC or Corporation? Course Number: TAX272207 IRS Course Number: BSND7-T-00047-15-S Qualifies for 12 hours of CPE credit Name as it should appear on your Certificate: License State(s): License Number: Date Course Completed: PTIN: If you are mailing or faxing your test to us for grading, please fill in Member ID and Validation number. Where should we send your results? * Note: If you are registered with the IRS as a tax preparer, you must provide your PTIN in order for us to report this course completion to the IRS. * Answer each question A, B, C, or D as appropriate. * Be sure you are answering questions from the Final Examination, not from the Study Guide * For instant online grading, go to www.cpestore.com and click the link for Online Services 1. 13. 25. 37. 49. 2. 14. 26. 38. 50. 3. 15. 27. 39. 51. 4. 16. 28. 40. 52. 5. 17. 29. 41. 53. 6. 18. 30. 42. 54. 7. 19. 31. 43. 55. 8. 20. 32. 44. 56. 9. 21. 33. 45. 57. 10. 22. 34. 46. 58. 11. 23. 35. 47. 59. 12. 24. 36. 48. 60. Page 1 of 1
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