John Is in the Planning Stages of Forming a Business

question 13

Multiple Choice

John is in the planning stages of forming a business with several others.John has heard that an LLC would provide the best of both worlds,that is,partnership taxation and limited liability.But John has also heard that one must very carefully structure an LLC or the Internal Revenue Service might deny partnership taxation.Lastly,John needs to review his overall tax situation because he thinks that corporate taxation might actually be better for his particular situation.Which of the following is true?

• A) Unless structured with the precisely correct provisions and characteristics,an LLC risks a determination by the Internal Revenue Service that it will be taxed in a manner different than the owners intended.
• B) The Internal Revenue Service now taxes all LLCs as partnerships.
• C) The LLC can choose whether it wants to be taxed as a partnership or corporation,but once this determination is made,it will apply to all owners of the LLC.
• D) Each of the owners of the LLC can choose partnership or corporate tax treatment of their income from the LLC,thus John will be free to choose corporate treatment even if all the other owners choose to be taxed as owning an interest in a partnership.
• E) The Internal Revenue Service will determine the tax treatment,but this will be done separately for each owner based on that owner's tax situation,thus it might determine partnership taxation for some members and corporate taxation for other owners.

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Definitions:

Telephone Operators

Individuals responsible for assisting customers in making telephone connections, including placing and connecting calls or providing information.

Machine-sewn Products

Goods that are manufactured using sewing machines, often implying mass production and consistent quality.

Wage Rate

The amount of money paid to an employee per unit of time, such as an hour or a week.

Capital

Refers to financial assets or the financial value of assets, such as cash and investments, as well as physical assets like machinery or buildings, used in the production of goods and services.