Business Entities

The exam pairs each entity with its liability and tax profile, then asks which entity fits a scenario. Learn the pattern once and most business-entity questions become a lookup rather than a puzzle.

What Is a General Partnership?

• Two or more persons carrying on a business for profit
• All partners have unlimited personal liability for partnership debts
• Income and losses pass through to partners' personal tax returns (no entity-level tax)
• Each general partner typically has equal management authority, unless the partnership agreement states otherwise
• Fiduciary duty exists between general partners (duty of loyalty, duty of care)
• The partnership dissolves upon the death or withdrawal of a general partner, unless the agreement provides otherwise

How Does a Limited Partnership Differ From a General Partnership?

• Requires at least one general partner (GP) and one limited partner (LP)
• GP: unlimited liability, manages the business, owes fiduciary duties
• LP: liability limited to the amount invested, no management authority
• Pass-through taxation; income and losses flow to partners' personal returns
• Liquidation priority: creditors first, then LPs, then the GP last

Exam Tip: Gotchas

• Limited partners are generally passive. Exercising control over the business may create personal-liability exposure, but the consequence depends on the governing partnership statute and the conduct involved.
• The general partner always has unlimited personal liability in a limited partnership.

How Does an LLC Combine Partnership and Corporate Benefits?

• Hybrid entity combining partnership tax benefits with corporate liability protection
• All members have limited liability, so personal assets are protected from business debts
• Default tax treatment is pass-through: a single-member LLC is taxed as a sole proprietorship, a multi-member LLC as a partnership
• Can elect to be taxed as an S-corp or C-corp
• Members can participate in management without losing liability protection, unlike LPs
• More flexible management structure than corporations, governed by an operating agreement
• No limit on the number of members; members can be individuals, corporations, other LLCs, or foreign entities

How Is a C-Corporation Taxed and Managed?

• Separate legal entity from its owners (shareholders)
• Limited liability for all shareholders
• Subject to double taxation:
  1. The corporation pays corporate income tax on profits
  2. Shareholders pay personal income tax on dividends received
• Can have unlimited shareholders of any type
• Managed by a board of directors elected by shareholders
• Perpetual existence: not affected by the death or transfer of shareholders
• Can issue multiple classes of stock (common and preferred)
• Can retain earnings for business use, subject to an accumulated earnings tax if excessive

How Does an S-Corporation Differ From a C-Corporation?

• Special tax election under Subchapter S of the Internal Revenue Code
• Pass-through taxation: income and losses flow to shareholders' personal returns, avoiding double taxation
• Limited liability for all shareholders, same as a C-corp
• Restrictions:
  • Maximum of 100 shareholders
  • Individual shareholders must be U.S. citizens or resident aliens (no foreign individual shareholders); eligible trusts, estates, and qualifying tax-exempt organizations are separate eligible-holder categories
  • Only one class of stock permitted
  • Shareholders must be individuals, certain trusts, or estates; corporations and partnerships generally cannot be shareholders, though certain tax-exempt organizations such as qualified retirement plans and charities may hold shares

Exam Tip: Gotchas

• Double taxation = C-corporation only. Every other entity here defaults to pass-through taxation, though an LLC can elect S- or C-corp treatment instead.
• 100 shareholder limit = S-corporation only. Among the multi-owner entities (partnerships, LLCs, corporations), no other type caps owners.

C-Corp vs. S-Corp comparison:

Exam Tip: Gotchas

When a question asks which entity provides BOTH liability protection AND pass-through taxation, the answers are LLC and S-corporation. General partnerships have pass-through taxation but no liability protection. C-corporations have liability protection but double taxation.

What Should You Check on Exam Day?

• Match liability first, then taxation. General partnerships and sole proprietorships: no protection. LLC, S-corp, C-corp: protection for all owners.
• Only a C-corporation double-taxes. Every other entity here defaults to pass-through taxation, though an LLC can elect S- or C-corp treatment instead.
• LLC and S-corp are the entities that give both liability protection and pass-through taxation together.
• S-corp restrictions travel as a set: 100 shareholders, U.S. individuals/eligible trusts/estates/qualifying tax-exempt organizations only, one stock class, no corporate or partnership shareholders.