CLA/CP Business Organization Types 1 Flashcards
6 cards from real CLA/CP Exam practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.
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Which business entity allows its owners to avoid personal liability while also electing to be taxed as a partnership?
Answer: Limited liability company (LLC)
An LLC provides limited liability protection to all its members and, by default, is taxed as a pass-through entity (like a partnership), avoiding the double taxation associated with C corporations.
A sole proprietorship differs from other business forms primarily because:
Answer: There is no legal distinction between the owner and the business
In a sole proprietorship, the business and owner are legally the same entity, meaning the owner has unlimited personal liability for all business obligations and debts.
In a general partnership, which of the following best describes each partner's liability for the partnership's debts?
Answer: Partners are jointly and severally liable for all partnership debts
In a general partnership, all partners are jointly and severally liable, meaning any one partner can be held personally responsible for the full amount of the partnership's debts, regardless of their ownership percentage.
Which statement correctly describes an S corporation?
Answer: It passes income and losses directly to shareholders, avoiding double taxation
An S corporation is a pass-through tax entity: income and losses flow through to shareholders' individual tax returns, so the corporation itself does not pay federal income tax, avoiding double taxation.
What is the primary distinguishing feature of a limited liability partnership (LLP) compared to a general partnership?
Answer: Each partner in an LLP is shielded from personal liability for the malpractice or negligence of other partners
The key feature of an LLP is that it protects each partner from vicarious liability for the wrongful acts, negligence, or misconduct of co-partners, while still allowing all partners to participate in management.
Which of the following is a characteristic unique to a close corporation compared to a publicly traded corporation?
Answer: A close corporation's shareholders may manage the business directly without a formal board of directors
Close corporations, which have a small number of shareholders, are often permitted by state statute to dispense with formal board structures and allow shareholders to manage the corporation directly, making them more flexible than traditional corporations.