Business organization & licensing: New Mexico Contractor Business & Law Practice Questions

Which form of business gives the owner the least protection from the business's debts?

A sole proprietor and the business are legally the same person, so the owner's personal assets can be reached for business debts. LLCs and corporations normally limit the owner's loss to what was invested.

In a general partnership, who is personally liable for the partnership's debts?

General partners are each personally liable for partnership obligations, including debts created by another partner acting for the business. That is the main drawback of a general partnership.

In a limited partnership, what is the usual trade-off for a limited partner's protection from partnership debts?

A limited partnership needs at least one general partner who runs the business and has unlimited liability. Limited partners invest and share profits but generally stay out of management to keep their limited liability.

What is the main tax disadvantage of a regular C corporation?

A C corporation pays income tax on its profit, and shareholders pay tax again on dividends they receive. The one-class-of-stock rule belongs to S corporations.

Which of these would prevent a corporation from electing S corporation status?

An S corporation must be a domestic corporation with no more than 100 shareholders, only allowable shareholders (individuals, certain trusts and estates, not partnerships or corporations) and one class of stock.

What is the maximum number of shareholders an S corporation may have?

The Internal Revenue Code allows an S corporation up to 100 shareholders, with family members able to be counted as one shareholder.

Which IRS form does a corporation file to elect S corporation status?

Form 2553, signed by all shareholders, makes the S election. Form 1120-S is the annual S corporation return that is filed after the election is in place, and Form SS-4 applies for an EIN.

How are an S corporation's profits generally taxed?

An S corporation generally pays no federal income tax itself. Income, losses, deductions and credits flow to shareholders, who report them on their own returns, avoiding double taxation.

For federal income tax, how is a single-member LLC treated if it makes no election?

By default, a single-member LLC is disregarded for income tax, so a sole owner reports its income on Schedule C. A multi-member LLC defaults to partnership treatment. Either may elect corporate treatment.

Which annual federal return does a partnership file to report its income?

A partnership files Form 1065, an information return, and gives each partner a Schedule K-1 showing that partner's share. The partners pay the tax on their own returns.

How does a contractor's business obtain an Employer Identification Number (EIN)?

The EIN is issued by the IRS, either online or on Form SS-4. Employers need it for payroll tax returns, W-2s and deposits.

A sole proprietor with no employees later hires two helpers. What must the business have for payroll tax filings?

Any business that has employees needs an EIN to file Forms 941 and 940 and issue W-2s. SAM.gov registration is only for doing business with the federal government.

In general, how does a contractor license differ from a contractor registration?

Licensing generally means the state tests competency (exams, experience, financial standing). Registration often only requires filing information, insurance or a bond. Each state uses its own terms.

What is the usual role of a qualifying agent (qualifier) for a licensed contracting company?

Many states license a business through a qualifier who passed the exams and is responsible for supervising the company's construction work and compliance. Rules on how many companies one person may qualify vary by state.

A company's only qualifier quits. What should the company generally expect under most state licensing laws?

Because the license depends on a qualified person, losing that person usually triggers a notice duty and a deadline to name a replacement, or the license is suspended or cancelled. The deadline differs by state.