Key Takeaways
- Sole Prop: Schedule C, unlimited liability, SE tax.
- Partnership: Form 1065, pass-through, K-1 to partners.
- C-Corp: Form 1120, 21% flat rate (Tax Year 2024), double taxation.
- S-Corp: Form 1120-S, pass-through, 100 shareholder limit.
- Schedule M-3: required if assets ≥$10 million.
- Federal tax classification may differ from state law designation.
Last updated: January 2026
Overview of Entity Types
Why This Matters for the Exam
Entity types are foundational. Know the filing form, tax treatment, and liability for each structure.
Exam Note: For the May 2025 - February 2026 testing window, you are tested on entity rules as of December 31, 2024 (Tax Year 2024).
Expect at least 3-4 questions on entity types.
The Four Primary Entities
| Entity | Filing Form | Tax Treatment | Liability |
|---|---|---|---|
| Sole Proprietorship | Sch C (1040) | Disregarded | Unlimited |
| Partnership | Form 1065 | Pass-through | Unlimited (GP) |
| C-Corporation | Form 1120 | Entity-level (21%) | Limited |
| S-Corporation | Form 1120-S | Pass-through | Limited |
Sole Proprietorship
| Feature | Description |
|---|---|
| Owner | One individual |
| Filing | Schedule C (Form 1040) |
| Liability | Unlimited (personal assets exposed) |
| SE Tax | Yes (on net earnings) |
Partnership
| Feature | Description |
|---|---|
| Owners | 2+ persons |
| Filing | Form 1065 (information return) |
| K-1 | Issued to each partner |
| Tax | Partners pay on share (whether distributed or not) |
C-Corporation (Tax Year 2024)
| Feature | Description |
|---|---|
| Filing | Form 1120 |
| Rate | Flat 21% |
| Dividends | Taxed again (0%, 15%, 20%) |
| Double taxation | Yes (corp + shareholder) |
S-Corporation
| Feature | Description |
|---|---|
| Election | Form 2553 |
| Filing | Form 1120-S |
| Shareholders | Max 100 |
| Stock classes | One class only |
| Restrictions | No foreign or corporate shareholders |
Schedule M-1 vs. M-3
| Assets | Schedule |
|---|---|
| <$10 million | M-1 |
| ≥$10 million | M-3 (mandatory) |
Real-World Scenario
Scenario: Corporation with $15 million assets.
- Threshold: $10 million.
- Required: Schedule M-3 (detailed book-tax reconciliation).
On the Exam
Expect 3-4 questions on entity types, typically:
- Form Questions: "What form does S-Corp file?"
- Rate Questions: "What is C-Corp rate?"
- M-3 Questions: "When is M-3 required?"
The key is to remember: Sole = Sch C. Partnership = 1065. C-Corp = 1120 (21%). S-Corp = 1120-S. M-3 = $10M+ assets.
Test Your Knowledge
Corporation with $15 million assets. Which schedule for book-tax reconciliation?
A
B
C
D
Test Your Knowledge
C-Corporation tax rate for Tax Year 2024?
A
B
C
D
Test Your Knowledge
S-Corporation files which form?
A
B
C
D