Quick Answer
Across the six business structures in this unit, liability and taxation move independently: sole proprietorships and general partnerships carry unlimited liability with pass-through tax, LLCs and S-corporations pair limited liability with pass-through tax, and only C-corporations combine limited liability with double taxation.
Use the table below as the single lookup for any liability-versus-taxation question. The investor classification thresholds that also appear in this chapter's questions live in other units; the cross-references at the end point to where each is actually taught.
How Do the Six Entity Types Compare on Taxation and Liability?
| Entity Type | Taxation | Liability | Key Characteristic |
|---|---|---|---|
| Sole proprietorship | Pass-through | Unlimited | Simplest structure |
| General partnership | Pass-through | Unlimited (all partners) | Joint management |
| Limited partnership | Pass-through | General partner (GP) unlimited; limited partner (LP) limited | LP cannot manage |
| Limited liability company (LLC) | Pass-through (default) | Limited (all members) | Flexible; can elect corp taxation |
| S-Corporation | Pass-through | Limited | Max 100 eligible holders (U.S. individuals, certain trusts/estates, qualifying tax-exempt orgs); 1 stock class |
| C-Corporation | Double taxation | Limited | Unlimited shareholders; multiple stock classes |
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.
Where Are Accredited Investor, Qualified Client, and Qualified Purchaser Taught?
Accredited Investor, Qualified Client, and Qualified Purchaser are testable, but they live with the rules that define them, not with client-type classification:
- Accredited Investor (the income and net-worth threshold for Regulation D private placements): taught in the Securities Issuer Regulation unit (Reg D context) and the Private Funds unit (small-investor exemption context)
- Qualified Client (the client's AUM-with-that-adviser or net-worth test that permits an adviser to charge that client performance-based fees): taught in the Investment Adviser Representative Regulation unit (performance-based fees and IAR de minimis)
- Qualified Purchaser (the $5 million investable-assets threshold under the Investment Company Act of 1940): taught in the Private Funds unit (qualified-purchaser exemption context)
What Should You Check on Exam Day?
- Liability and taxation are two separate axes; do not assume one predicts the other.
- Only LLC and S-corporation combine limited liability with pass-through taxation.
- If a question raises an accredited investor, qualified client, or qualified purchaser threshold, it is testing a different unit's rule, not client-type classification itself.