The most common forms of business are the sole proprietorship, partnership, and corporation. When beginning a business, you must decide which form of business to use. You must consider the legal and tax considerations when deciding which form of business to use.

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Material needed to complete this assignment:

You will need IRS Publication 583, IRS Publication 541, IRS Publication 542 and IRS Publication 3402 to complete this topic.

1. Generally, a partnership does not pay tax on its income but "passes through" any profits or losses to its partners.

True False

2. An entity formed under state law by filing articles of organization where none of the members are personally liable for its debts.

A. Partnership.
B. Sole Proprietorship.
C. Limited Liability Company (LLC).
D. None of the above.

3. Members of a family can be partners. However, family members (or any other person) will be recognized as partners only if

A. If capital is a material income-producing factor they acquired their capital interest in a bona fide transaction, (even if by gift or purchase from another family member), actually own the partnership interest, and actually control the interest.
B. If capital is not a material income-producing factor they joined together in good faith to conduct a business.
C. They agreed that contributions of each entitle them to share in the profits, and some capital or service has been (or is) provided by each partner.
D. Any of the above.

4. A capital interest in a partnership is an interest in its assets that is distributable to the owner of the interest when

A. The owner withdraws from the partnership.
B. The partnership liquidates.
C. The right to share in earnings and profits.
D. Either A or B above.

5. An organization formed after 1996 is classified as a partnership for federal tax purposes if it has two or more members and is

A. An insurance company.
B. A tax-exempt organization.
C. A real estate investment trust.
D. None of the above.

6. A qualified entity is a business entity that meets the following requirement

A. The business entity is wholly owned by a husband and wife as community property under the laws of a state, a foreign country, or a possession of the United States.
B. No person other than one or both spouses would be considered an owner for federal tax purposes.
C. The business entity is not treated as a corporation.
D. All of the above.

7. If a corporation receives a below-market loan and uses the proceeds for its trade or business, it may be able to deduct the forgone interest. A below-market loan generally is treated as an arm's-length transaction in which the borrower is considered as having received

A. A loan in exchange for a note that requires payment of interest at the applicable federal rate.
B. An additional payment in an amount equal to the forgone interest.
C. Both A and B above.
D. None of the above.

8. A corporation cannot deduct charitable contributions that exceed 10% of its taxable income for the tax year. Figure taxable income for this purpose without

A. The deduction for charitable contributions.
B. The dividends-received deduction.
C. The domestic production activities deduction.
D. Any of the above.

9. A corporation figures an NOL in the same way it figures taxable income. It starts with its gross income and subtracts its deductions. If its deductions are more than its gross income, the corporation has an NOL. However, the following rule for figuring the NOL applies.

A. A corporation can increase its current year NOL by carrybacks or carryovers from other years.
B. A corporation can use the domestic production activities deduction to create or increase its current year NOL, including any carryback or carryover.
C. A corporation can take the deduction for dividend, received without regard to the aggregate limits that normally apply.
D. A corporation cannot figure the deduction for dividends paid on certain preferred stock of public utilities.

10. A corporation can deduct capital losses only up to the amount of its capital gains. If a corporation has an excess capital loss, it cannot deduct the loss in the current tax year. Instead, it carries the loss to other tax years and deducts it from any net capital gains that occur in those years. When carrying a capital loss from one year to another, the following applies.

A. When figuring the current year's net capital loss, you cannot combine it with a capital loss carried from another year.
B. If you carry capital losses from 2 or more years to the same year, deduct the loss from the earliest year first.
C. You cannot use a capital loss carried from another year to produce or increase a net operating loss in the year to which you carry it back.
D. All of the above.

11. To report its income, gain, losses, deductions, credit, and to figure its income tax liability a corporation generally must file

A. Form 1120.
B. Form 1040.
C. Form 2210.
D. Form 7004.

12. A corporation is treated as a small corporation exempt from the AMT for its current tax year if that year is the corporation's first tax year in existence (regardless of its gross receipts for the year) or

A. It was treated as a small corporation exempt from the AMT for all prior tax years beginning after 1997.
B. Its average annual gross receipts for the 3-tax-year period (or portion there of during which the corporation was in existence) ending before its current tax year did not exceed $7.5 million ($5 million if the corporation had only 1 prior tax year).
C. Both A and B above.
D. Use Form 4626 to figure the tentative minimum tax of a corporation.

13. This is an unincorporated business that is owned by one individual. It is the simplest form of business organization to start and maintain. This business has no existence apart from the owner, and its personal liabilities are  the owners personal liabilities.

A. Sole proprietorship.
B. Partnership.
C. Corporation.
D. Limited Liability Company.

14. This is the relationship existing between two or more persons who join to carry on a trade or business. Each person contributes money, property, labor, or skill, and expects to share in the profits and losses of the business. It must file annual information returns to report the income, deductions, gains, losses, etc., from its operations, but it does not pay income tax.

A. Sole proprietorship.
B. Partnership.
C. Corporation.
D. Limited Liability Company.

15. In this form of business organization, prospective shareholders exchange money, property, or both, for the capital stock. It generally takes the same deductions as a sole proprietorship to figure its taxable its taxable income and it can also take special deductions. Its profits are taxed when earned, and then taxed to the shareholders when distributed as dividends.

A. Sole proprietorship.
B. Partnership.
C. Corporation.
D. Limited Liability Company.

16. In this form of business organization, shareholders include their share of separately stated items of income, deductions, loss, and credit, and their share of non-separately stated income or loss. One can avoid double taxation by electing to be treated as

A. Sole proprietorship.
B. Corporation.
C. S Corporation.
D. Limited Liability Company.

17. In this form of business organization, none of the members are personally liable for its debts. It may be classified for federal income tax purposes as either a partnership, a corporation, or an entity disregarded as an entity separate from its owner. This is an entity formed under state law by filing articles of organization as

A. Limited Liability Company.
B. S Corporation.
C. Sole Proprietorship.
D. Partnership.

18. You must have a taxpayer identification number so the IRS can process your returns. The two most common kinds of taxpayer identification numbers are the social security number (SSN) and the employer identification number (EIN). If you don't already have an EIN, you need to get one if you

A. Have employees or have a qualified retirement plan.
B. Operate your business as a corporation or partnership.
C. File returns for employment taxes or excise taxes.
D. Any of the above.

19. A single-member LLC is required to use its name and EINs to

A. Register for excise tax activities on Form 637.                 
B. Pay and report excise tax taxes reported on Forms 720, 730, 2290, and 11-C.
C. Claim any refunds, credits, and payments on Form 8849.
D. All of the above.

20. If an LLC has at least two members and is classified as a partnership, it generally must file

A. Form 1065.
B. Form 1120.
C. Form 2553.
D. Form 8832.