Chapter 15 Entities Overview

1. [LO 1] What are the most common legal entities
used for operating a business? How are these entities treated similarly and
differently for state law purposes?

2. [LO 1] How
do business owners create legal entities? Is the process the same for all
entities? If not, what are the differences?

3. [LO 1] What
is an operating agreement for an LLC? Are operating agreements required for
limited liability companies? If not, why might it be important to have one?

4. [LO 1]
Explain how legal entities differ in terms of the liability protection they
afford their owners.

5. [LO 1] Why
are C corporations still popular despite the double tax on their income?

6. [LO 1] Why
is it a nontax advantage for corporations to be able to trade their stock on
the stock market?

7. [LO 1] How
do corporations protect shareholders from liability? If you formed a small
corporation, would you be able to avoid repaying a bank loan from your
community bank if the corporation went bankrupt? Explain.

8. [LO 1, LO 2]
Other than corporations, are there other legal entities that offer liability
protection? Are any of them taxed as flow-through entities? Explain.

9. [LO 2] In
general, how are unincorporated entities classified for tax purposes?

10. [LO 2] Can
unincorporated legal entities ever be treated as corporations for tax purposes?
Can corporations ever be treated as flow-through entities for tax purposes?
Explain.

11. [LO 2] What
are the differences, if any, between the legal and tax classification of
business entities?

12. [LO 2] What
types of business entities does our tax system recognize?

13. [LO 3] Who
pays the first level of tax on a C corporation’s income? What is the tax rate
applicable to the first level of tax?

14. [LO 3] Who
pays the second level of tax on a C corporation’s income? What is the tax rate
applicable to the second level of tax and when is it levied?

15. [LO 3] Is
it possible for shareholders to defer or avoid the second level of tax on
corporate income? Briefly explain.

16. [LO 3] How
does a corporation’s decision to pay dividends affect its overall tax rate
[(corporate level tax + shareholder level tax)/taxable income]?

17. [LO 3] Is
it possible for the overall tax rate on corporate taxable income to be lower
than the tax rate on flow-through entity taxable income? If so, under what
conditions would you expect the overall corporate tax rate to be lower?

18. [LO 3]
Assume Congress increases individual tax rates on ordinary income while leaving
all other tax rates constant. How would this change affect the overall tax rate
on corporate taxable income? How would this change affect overall tax rates for
owners of flow-through entities?

19. [LO 3]
Assume Congress increases the dividend tax rate to the ordinary income rate
while leaving all other tax rates constant. How would this change affect the
overall tax rate on corporate taxable income?

20. [LO 3]
Evaluate the following statement: “When dividends and long-term capital gains
are taxed at the same rate, the overall
tax rate on corporate income is the same whether the corporation distributes
its after-tax earnings as a dividend or whether it reinvests the after-tax
earnings to increase the value of the corporation.”

21. [LO 3] If
XYZ corporation is a shareholder of BCD corporation, how many levels of tax is
BCD’s before-tax income potentially subject to? Has Congress provided any tax
relief for this result? Explain.

22. [LO 3] How
many times is income from a C corporation taxed if a retirement fund is the
owner of the corporation’s stock? Explain.

23. [LO 3] List
four basic tax planning strategies that corporations and shareholders can use
to mitigate double taxation of a taxable corporation’s taxable income.

24. [LO 3]
Explain why paying a salary to an employee-shareholder is an effective way to
mitigate the double taxation of corporate income.

25. [LO 3] What
limits apply to the amount of deductible salary a corporation may pay to an
employee-shareholder?