CLA/CP Exam Business Organization Types 3 — Questions and Answers
Question 1: Which entity type requires an S corporation election to be made by filing Form 2553 with the IRS?
- C corporation
- S corporation (Correct answer)
- LLC
- General partnership
Correct answer: S corporation
A corporation must affirmatively elect S corporation status by filing IRS Form 2553, which must be signed by all shareholders.
Question 2: How many shareholders may an S corporation have?
- No more than 35
- No more than 75
- No more than 100 (Correct answer)
- There is no limit
Correct answer: No more than 100
Under current IRS rules, an S corporation may have no more than 100 shareholders, and all must be eligible (U.S. citizens or resident aliens, not corporations or partnerships).
Question 3: A corporation incorporated in Delaware but operating primarily in California is considered a ________ in California.
- Domestic corporation
- Foreign corporation (Correct answer)
- Alien corporation
- Non-profit corporation
Correct answer: Foreign corporation
A corporation is 'domestic' in its state of incorporation and 'foreign' in every other state where it transacts business.
Question 4: Which of the following is required to form a corporation in most states?
- Filing articles of incorporation with the state (Correct answer)
- Executing a shareholders' agreement
- Adopting corporate bylaws before filing
- Obtaining IRS approval of the corporate name
Correct answer: Filing articles of incorporation with the state
A corporation is formed by filing articles of incorporation (also called a certificate of incorporation) with the appropriate state authority, typically the Secretary of State.
Question 5: In a limited liability partnership (LLP), a partner is generally NOT liable for:
- Their own negligent acts
- Partnership debts arising from another partner's malpractice (Correct answer)
- Debts they personally guarantee
- Business debts they knowingly authorize
Correct answer: Partnership debts arising from another partner's malpractice
LLPs protect partners from vicarious liability for the negligent acts or misconduct of other partners, though each partner remains personally liable for their own wrongful conduct.
Question 6: A joint venture differs from a partnership primarily because:
- Joint ventures always have limited liability
- A joint venture is typically formed for a single specific project or transaction (Correct answer)
- Joint ventures must be incorporated
- Joint ventures cannot have more than two parties
Correct answer: A joint venture is typically formed for a single specific project or transaction
A joint venture is generally a short-term arrangement for a specific project, while a partnership is intended for an ongoing business relationship.
Question 7: Which statement about a sole proprietorship is TRUE?
- It provides limited liability to the owner
- It requires filing organizational documents with the state
- The owner and the business are legally the same entity (Correct answer)
- It is taxed separately from the owner
Correct answer: The owner and the business are legally the same entity
In a sole proprietorship, no legal distinction exists between the owner and the business—the owner is personally liable for all business debts and reports all income on their personal tax return.
CLA/CP Exam Business Organization Types 3
Which entity type requires an S corporation election to be made by filing Form 2553 with the IRS?