Chapter 7 Quiz: Preparing the Proper Ethical and Legal Foundation

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Questions and Answers

What is the primary reason why some businesses require federal licenses and/or permits to operate?

To collect sales tax and revenue

To control the type of products or services offered

To ensure public safety and welfare (correct)

To regulate employment and labor laws

Which of the following types of businesses typically require professional and occupational licenses and permits?

Restaurant owners and chefs

Barbers and real estate agents (correct)

Software developers and IT consultants

Retail store owners and managers

What is one of the main purposes of registering a business with the state?

To obtain a local business license

To comply with business registration requirements (correct)

To obtain a sales tax permit

To obtain a federal license

Which category of licenses and permits is required for businesses that sell goods and services?

Sales Tax Permits Signup and view all the answers

What type of license or permit is required to operate a child care center?

Local License or Permit Signup and view all the answers

Why do businesses need to obtain licenses and permits?

To comply with federal, state, and local regulations Signup and view all the answers

What is an example of a business that may require a federal license or permit?

Radio and Television Broadcasting Signup and view all the answers

What is the purpose of obtaining a sales tax permit?

To collect and submit sales tax to the state Signup and view all the answers

What type of permit is required if you are building or remodeling?

Building permit Signup and view all the answers

What is the purpose of a fictitious business name permit?

To allow a business to operate under a fictitious name Signup and view all the answers

What is required for businesses that do not have employees, except for sole proprietorships?

A Federal Employee Identification Number Signup and view all the answers

What is the easiest way to obtain an EIN?

By going to <a href="http://www.irs.com">www.irs.com</a> and clicking on Apply for an EIN online Signup and view all the answers

What is the simplest form of business entity?

Sole Proprietorship Signup and view all the answers

What is a characteristic of a sole proprietorship?

It is not a separate legal entity Signup and view all the answers

What type of permit may be required to erect a sign?

Signage permit Signup and view all the answers

What is required for businesses that prepare food?

A health permit Signup and view all the answers

What is a major advantage of a limited liability company?

Tax advantages of a partnership and limited liability of a corporation Signup and view all the answers

What is a disadvantage of a limited liability company?

Setting up and maintaining one is more difficult and expensive Signup and view all the answers

How are profits taxed in a limited liability company?

Only at the shareholder level Signup and view all the answers

What is a benefit of the flexibility in taxation of a limited liability company?

It can be taxed as a sole proprietor, partnership, S corporation, or corporation Signup and view all the answers

Why is there a lack of legal precedent for limited liability companies?

They are a relatively new type of business entity Signup and view all the answers

What is a franchise tax, as it relates to limited liability companies?

A fee the LLC pays the state for the benefit of limited liability Signup and view all the answers

Why might limited liability companies face more complex tax accounting?

Because they can elect to be taxed as various types of business entities Signup and view all the answers

What is a limitation of a limited liability company's liability protection?

Members are liable for the debts and obligations of the business only up to the amount of their investment Signup and view all the answers

Study Notes

Obtaining Business Licenses and Permits

Businesses may need local, state, and/or federal licenses and permits to operate.
Examples of businesses that require federal licenses and/or permits include those that sell or provide alcohol, firearms, animal transport across state lines, commercial fisheries, preparation of meat products, and radio and television broadcasting.

State Licenses and Permits

Three categories of licenses and permits may be needed:
- Business Registration Requirements: Some states require all new businesses to register with the state.
- Sales Tax Permits: Most states and communities require businesses that sell goods and some services to collect sales tax and submit it to the state authorities.
- Professional and Occupational Licenses and Permits: Examples include barbers, nurses, tattoo artists, and real estate agents who need to pass a state exam and maintain a professional license to conduct business.

Local Licenses and Permits

Two categories of licenses and permits may be needed:
- Licenses to operate a certain type of business, such as child care, barber shops, automotive repair, and hotels and motels.
- Permits for engaging in certain activities, such as building permits, health permits, and signage permits.

Additional Requirements

Fictitious Business Name Permit (dba): Needed if the business operates under a fictitious name.
Federal Employee Identification Number (EIN): Required for businesses except sole proprietorships with no employees.

Choosing a Form of Business Ownership

Four common legal entities:
- Sole Proprietorship
- Partnership
- Corporation
- Limited Liability Company

Sole Proprietorship

A sole proprietorship involves one person, and the person and the business are essentially the same.
It is a popular choice for start-up firms.

Limited Liability Company (LLC)

Combines the limited liability advantage of a corporation with the tax advantages of a partnership.
Does not pay taxes; profits and losses are passed through to the tax returns of the owners.

Advantages of a Limited Liability Company

Members are liable for debts and obligations only up to the amount of their investment.
Unlimited shareholders are allowed.
Can elect to be taxed as a sole proprietor, partnership, S corporation, or corporation, providing flexibility.
No double taxation, as profits are taxed only at the shareholder level.

Disadvantages of a Limited Liability Company

Setting up and maintaining an LLC is more difficult and expensive.
Tax accounting can be complicated.
Regulations governing LLCs vary by state.
Limited legal precedent available for owners to anticipate how legal disputes might affect their business.
Some states levy a franchise tax on LLCs, which is essentially a fee for the benefit of limited liability.

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Description

This quiz covers the different types of licenses and permits required for businesses to operate, including local, state, and federal licenses and permits.

chapter 7- preparing the proper ethical and legal foundation

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