CC Business and Financial Management 2 — Questions and Answers
Question 1: What is the primary advantage of organizing a contracting business as an LLC?
- It provides personal liability protection for the owners (Correct answer)
- It eliminates the need for a contractor license
- It removes tax obligations
- It allows the business to operate without insurance
Correct answer: It provides personal liability protection for the owners
An LLC (Limited Liability Company) separates the owner's personal assets from business liabilities, protecting personal wealth in the event of a lawsuit.
Question 2: What is 'workers' compensation' and why is it important for contractors?
- Insurance that covers employees injured on the job, required in most states for contractors with employees (Correct answer)
- A bonus paid to workers for fast completion
- A type of contractor license
- A federal tax program
Correct answer: Insurance that covers employees injured on the job, required in most states for contractors with employees
Workers' comp provides medical and wage replacement benefits to injured employees and protects contractors from costly personal injury lawsuits.
Question 3: What does a contractor's 'markup' cover when pricing a job?
- Overhead costs and profit margin added on top of direct project costs (Correct answer)
- The cost of permits only
- Material costs without labor
- Taxes owed to the IRS
Correct answer: Overhead costs and profit margin added on top of direct project costs
Markup is the percentage added to direct costs to recover overhead expenses and generate a profit for the business.
Question 4: Which tax form must a contractor issue to unincorporated subcontractors paid $600 or more in a tax year?
- Form 1099-NEC (Correct answer)
- Form W-2
- Form 941
- Form 1040
Correct answer: Form 1099-NEC
Contractors must issue IRS Form 1099-NEC to independent subcontractors paid $600 or more to report non-employee compensation.
Question 5: What is 'accounts receivable' in a contracting business?
- Money owed to the contractor for completed work that has not yet been paid (Correct answer)
- Money the contractor owes to suppliers
- Funds in the business bank account
- Prepaid insurance premiums
Correct answer: Money owed to the contractor for completed work that has not yet been paid
Accounts receivable represents invoices sent to clients for work already performed but not yet collected, reflecting the business's outstanding revenue.
Question 6: What is the purpose of a 'lien release bond' also known as a 'discharge bond'?
- To release a mechanics lien from a property by substituting a bond as security for the disputed amount (Correct answer)
- To obtain a new contractor license
- To replace a performance bond
- To cancel a building permit
Correct answer: To release a mechanics lien from a property by substituting a bond as security for the disputed amount
A lien release bond removes the lien from the property title and substitutes the bond as collateral, allowing property sales or refinancing to proceed.
CC Business and Financial Management 2
What is the primary advantage of organizing a contracting business as an LLC?