Characteristics and Income Taxation of Business Entities - Answer Key

1. D

All the statements above are true, except that the penalty for excess accumulated earnings is 15%, not 20%.

2. B  

All of the answers are good answers, but there's two key concepts: profitable business and raise capital. A profitable business indicates a need for a separate entity and raise capital indicates that he might want to sell some stock. C-corporation is the best entity for Roger's needs.

3.
A

S-corporations CAN HAVE a trust as shareholder, less than 75 shareholders, only one class of stock, and they avoid double taxation by paying dividends.

4.
C

Betty will have taxable dividends from the utility stock (1099-DIV) and unarned income from the S-corp (Schedule K-1). Since she is no longer working, she would not receive any W-2.

5.
D

General partners have unlimited liability. Partnerships are dissolved at the death, bankruptcy or incapacity of a partner. Partnerships must file a tax return Form 1065, but it is for information purposes only.

6.
B

80% exclusion if ownership in the dividend paying firm is between 20-80%

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