ASSESSMENT QUESTIONS

Question 1

Scissorhands is the sole owner of a landscaping business, Scissorhands Landscaping LLC (SLL), for which he works full time. Scissorhands recently converted the business from a sole proprietorship to an LLC organized in Rhode Island. SLL has one class of membership interests outstanding which are all owned by Scissorhands, a U.S. citizen. The business generates roughly $100,000 in annual profits after deducting Scissorhands' $50,000 salary. What tax classification is likely to result in the lowest aggregate amount of income and employment tax paid by Scissorhands and SLL?

(A) Disregarded entity

(B) Sub-C

(C) Sub-K

(D) Sub-S

Question 2

Bounce and Spring are starting a trampoline park in Charleston, South Carolina. They will both actively participate in the business. They are well aware of the risk of injury associated with kids on trampolines so want to go with an entity that provides the best inside liability shield. Which entity should they choose?

(A) Limited liability partnership

(B) Limited liability company

(C) Limited partnership

(D) Corporation

Question 3

Kyle, Mary, and Bob are starting a house painting business. They will each contribute $20,000 for their ownership stakes. For estate planning purposes, Bob's investment has to be made through his LLC (i.e., his company and not Bob will be the owner of Bob's ownership stake in the house painting business). Their priorities in rank order are to (1) minimize taxes, (2) protect personal wealth, and (3) minimize legal and filing fees. The house painting business should be formed as:

(A) A corporation taxed under Sub-S

(B) A limited partnership taxed under Sub-K

(C) A limited liability company taxed under Sub-K

(D) A limited liability company taxed under Sub-S

Reference: Business Organizations; A Transactional Approach by SJOSTROM