11.1 Overview of Entity Types
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 (made PERMANENT by OBBBA), 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.
- OBBBA (signed July 4, 2025) made TCJA's 21% corporate rate and §199A QBI deduction permanent.
Last updated: May 2026
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 July 1, 2026 – February 28, 2027 testing window, you are tested on entity rules as of December 31, 2025 (Tax Year 2025), including the One Big Beautiful Bill Act (OBBBA, signed July 4, 2025).
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% — permanent) | Limited |
| S-Corporation | Form 1120-S | Pass-through (§199A QBI permanent) | Limited |
Sole Proprietorship
| Feature | Description |
|---|---|
| Owner | One individual |
| Filing | Schedule C (Form 1040) |
| Liability | Unlimited (personal assets exposed) |
| SE Tax | Yes (on net earnings) |
| QBI | Eligible for §199A (20% — permanent under OBBBA) |
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) |
| QBI | Pass-through income eligible for 20% §199A (permanent) |
C-Corporation (Tax Year 2025)
| Feature | Description |
|---|---|
| Filing | Form 1120 |
| Rate | Flat 21% — made PERMANENT by OBBBA (no scheduled sunset) |
| Dividends | Taxed again (0%, 15%, 20%) |
| Double taxation | Yes (corp + shareholder) |
| §1202 QSBS | Expanded by OBBBA for stock acquired after July 4, 2025 (see 11.3) |
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 |
| QBI | Pass-through eligible; §199A permanent under OBBBA |
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?" (21% — permanent under OBBBA)
- M-3 Questions: "When is M-3 required?"
The key is to remember: Sole = Sch C. Partnership = 1065. C-Corp = 1120 (21% permanent). 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 2025 (post-OBBBA)?
A
B
C
D
Test Your Knowledge
S-Corporation files which form?
A
B
C
D