CLA/CP Exam Business Organization Types 2

Question 1

Which business entity type provides owners with limited liability protection while allowing profits and losses to pass directly to owners' personal tax returns without entity-level taxation?

Accepted Answer

Limited liability company (LLC)

Answer

An LLC combines limited liability protection with pass-through taxation, avoiding the double taxation that affects C corporations.

Question 2

A limited partnership (LP) must have at least:

Accepted Answer

One general partner and one limited partner

Answer

A limited partnership requires at least one general partner (with unlimited liability) and at least one limited partner (with limited liability).

Question 3

Which document governs the internal operations of a limited liability company?

Accepted Answer

Operating agreement

Answer

An LLC's operating agreement sets forth the rights, duties, and obligations of members and managers, governing internal operations.

Question 4

A shareholder in a C corporation who is also an employee receives compensation. How is that compensation taxed?

Accepted Answer

At both the corporate level as a deduction and the shareholder's personal level as income

Answer

Compensation paid to a shareholder-employee is deducted by the corporation (reducing corporate tax) and is taxable income to the shareholder-employee.

Question 5

Which of the following is NOT a characteristic of a general partnership?

Accepted Answer

The partnership itself pays federal income taxes on profits

Answer

A general partnership is a pass-through entity; the partnership itself does not pay federal income tax—profits and losses pass through to individual partners.

CLA/CP Exam Practice Test

CLA/CP Exam Practice Test

CLA/CP Exam Business Organization Types 2