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Unformatted text preview: Chapter 13 Homework Solutions 1. What are the primary nontax factors to consider when choosing a form for doing business? When choosing a form for doing business, the number of owners, ability to limit personal liability of the owners, the ease with which ownership can be transferred, the anticipated life of the business, the degree of management control desired, the cost of organizing the entity, and the ability to raise capital are the nontax factors that should be considered. 2. Compare and contrast the characteristics of sole proprietorships, partnerships, corporations, S corporations, limited liability companies, and limited liability partnerships. A sole proprietorship is a one owner business, giving the owner complete managerial control. Because the sole proprietor and the business entity are not treated as separate entities by state law, a sole proprietor is liable for all debts of the business (unlimited liability). A sole proprietorship is easy (least costly) to form and ownership is easily transferable. However, a sole proprietorship often finds raising large amounts of capital difficult. A corporation is a separate legal entity formed under state law. As such, a corporation can enter into contracts, purchase assets, and conduct business in its own name. The separation of the corporation from its owners allow corporations to have an unlimited life, free transferability of ownership interests, and centralized management structures. More importantly, the owners of a corporation have limited liability. The costs of organizing a business as a corporation can be extensive. However, corporations can raise additional capital easily by selling additional stock. A partnership exists when two or more individuals engage collectively in an activity with the expectation of generating profits. Each partner is personally responsible for any partnership obligations that arise during the existence of the partnerships. Unlike a sole proprietorship, a partnership can transact business and own property in its name separate from the partners. General partners legally have equal ability to contribute to managing the partnership. An S corporation has the basic legal characteristics of a corporation combined with conduit entity taxation. However, the number of owners is restricted to 100, only certain types of entities can be owners, the corporation can have only one class of stock, and all of the owners must consent to the S corporation election. A limited liability company (LLC) combines limited liability with conduit tax treatment. It has many of the features of a corporation with a few significant exceptions. An LLC can create special income (loss) allocations (i.e., allocations based on factors other than ownership percentage) and controls who can be an owner (free transferability of interest does not exist). LLCs also have greater flexibility in determining management structures than a corporation. determining management structures than a corporation....
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- Fall '11