ExpertMedium1 markMultiple Choice
CPA · Question 30 · Area III: Entity Tax Planning
A taxpayer is forming a new entity with two other partners. They want to contribute appreciated property tax-free, have flexible profit-sharing allocations (not strictly based on ownership %), and avoid double taxation. Which entity type is most appropriate?
A taxpayer is forming a new entity with two other partners. They want to contribute appreciated property tax-free, have flexible profit-sharing allocations (not strictly based on ownership %), and avoid double taxation. Which entity type is most appropriate?
Answer options:
A.
C Corporation
B.
S Corporation
C.
Limited Liability Company (taxed as Partnership)
D.
Sole Proprietorship
How to approach this question
Match features: Flexible allocations = Partnership. No double tax = Partnership or S Corp. S Corp is rigid (one class of stock). Therefore, Partnership (LLC) is the winner.
Full Answer
C.Limited Liability Company (taxed as Partnership)✓ Correct
Limited Liability Company (taxed as Partnership)
Partnerships (and LLCs taxed as such) offer the greatest flexibility for special allocations of income/loss under IRC §704(b), provided they have substantial economic effect. S Corps require pro-rata allocations. C Corps have double tax.
Common mistakes
Choosing S Corp, forgetting the single class of stock rule prevents flexible profit sharing.
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