Chap015_rev - Chapter 15 - Entities Overview Chapter 15...

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Chapter 15 - Entities Overview Chapter 15 Entities Overview SOLUTIONS MANUAL Discussion Questions 1. [LO 1] What are the more common legal entities used for operating a business? How are these entities treated similarly and differently for state law purposes? Answer: Corporations, limited liability companies (LLCs), general and limited partnerships, and sole proprietorships. These entities differ in terms of the formalities that must be observed to create them, the legal rights and responsibilities conferred on them and their owners, and the tax rules that determine how they and their owners will be taxed. 2. [LO 1] How do business owners create legal entities? Is the process the same for all entities? If not, what are the differences? Answer: The process of creating legal entities differs by entity type. Business owners legally form corporations by filing articles of incorporation in the state of incorporation while business owners create limited liability companies by filing articles of organization in the state of organization. General partnerships may be formed either with or without written partnership agreements, and they typically can be formed without filing documents with the state. However, limited partnerships are usually organized by written agreement and must typically file a certificate of limited partnership to be recognized by the state. 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? Answer: An operating agreement is a written document among the owners of an LLC specifying the owners’ legal rights and responsibilities for dealing with each other. Generally, operating agreements are not required by law for limited liability companies; however, it might be important to have one to spell out the management practices of the new entity as well as the rights and responsibilities of the owners. 4. [LO 1] Explain how legal entities differ in terms of the liability protection they afford their owners. 15-1
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Chapter 15 - Entities Overview Answer: Corporations and LLCs offer owners limited liability. General partners and sole proprietors may be held personally responsible for the debts of the general partnership and sole proprietorship. However, limited partners are not responsible for the partnership’s liabilities. 5. [LO 1] Why are C corporations still popular despite the double tax on their income? Answer: Corporations have an advantage in liability protection compared to sole proprietorships and partnerships. In addition, corporations have an advantage if owners ever want to take a business public. As a result, corporations remain desirable legal entities despite their tax disadvantages.
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This note was uploaded on 03/06/2012 for the course AC 350 taught by Professor L during the Spring '12 term at UMass (Amherst).

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Chap015_rev - Chapter 15 - Entities Overview Chapter 15...

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