11.1 Entity Types and Terminology

The Paralegal CORE Competency Exam (PCCE) tests business organizations as a labeling skill. Domain 2 does not ask you to design a tax structure for a billion-dollar deal. It asks whether the facts describe a sole proprietorship, a partnership, an LLC, or a corporation; who can lose a house if the business is sued; and whether “S corporation” is a state filing or a tax election. Match the nouns — member, shareholder, partner, operating agreement, bylaws — and the item is usually finished.

This is federal-and-general teaching. State statutes vary on exact names, professional-entity endings, and how strong an LLP shield is. The exam still expects one national picture of each entity type.

Sole proprietorship: one person, no separate entity

A sole proprietorship is a business owned by one natural person. It is not a separate legal person. The owner and the business are the same taxpayer and the same defendant. No articles are filed to create it. Licenses, sales-tax accounts, and an assumed name / DBA may still be required to operate. The owner has unlimited personal liability for business contracts and torts. Creditors can reach personal assets. The “business” does not survive the owner as an entity; it is simply that person’s activity.

Exam tell: one owner, no creation filing, receipts in a personal account, and a plaintiff who can sue the individual by name.

General partnership: the default for two or more co-owners

Under the Uniform Partnership Act (UPA) / Revised Uniform Partnership Act (RUPA) approach taught on national exams, a general partnership exists when two or more persons associate as co-owners to carry on a business for profit. A written partnership agreement is wise. It is not required for the partnership to exist. Sharing profits is classic evidence of partnership.

Each general partner is an agent of the partnership and is jointly and severally liable for partnership obligations. A plaintiff may collect the entire judgment from any one partner. Partners then sort contribution among themselves. There is no limited-liability shield in a plain general partnership.

Exam tell: two or more people share profits and control, no LLC or corporate filing is mentioned, and the question wants joint and several personal liability.

Limited partnership: general partner plus limited partners

A limited partnership (LP) has at least one general partner (who manages and has unlimited liability) and one or more limited partners (who contribute capital and enjoy limited liability). An LP is created by filing a certificate of limited partnership with the state. Limited partners traditionally risked the shield if they participated in control. Modern ULPA / RULPA statutes relax that control rule, and states vary. On the PCCE, keep the classic picture unless the stem hands you a modern statute: the GP runs the show and is exposed; LPs are passive and shielded.

Limited liability partnership (LLP)

An LLP is a partnership that files a statement of qualification (or similar) to obtain a liability shield. Law and accounting firms often use it. Partners remain liable for their own malpractice and, depending on the statute, for people they supervise. Whether the shield is a partial shield (torts of other partners) or a full shield (contract debts too) is state-specific. Do not invent one national LLP statute. Remember two exam facts: an LLP is still a partnership, not a corporation, and it does not arise by default the way a general partnership does.

LLC: members, operating agreement, limited liability, pass-through

A limited liability company (LLC) is a state-law entity. Owners are members, not shareholders. The internal contract is an operating agreement, not bylaws. The LLC may be member-managed or manager-managed. Members generally have limited liability for LLC debts (unless they personally guarantee a loan or a court pierces the veil). Default federal tax treatment is pass-through: a single-member LLC is a disregarded entity; a multi-member LLC is taxed as a partnership unless it elects corporate tax. Formation requires a public filing — usually articles of organization or a certificate of organization.

Exam tell: the stem says “members,” “operating agreement,” or “articles of organization.” Calling members shareholders is a trap.

C corporation: shareholders, directors, officers, double tax

A corporation is a separate legal person. Shareholders own it. Directors manage it. Officers (president, secretary, treasurer, and others) run day-to-day operations as agents. It is formed by filing articles of incorporation (sometimes a certificate of incorporation) with the secretary of state. Existence is typically perpetual. Shareholders have limited liability.

A C corporation is the default tax classification for a corporation that has not made a valid S election. The PCCE cares about double tax conceptually: the entity may pay corporate income tax on earnings, and shareholders pay tax again on dividends. You do not need a rate table. You need the two-level picture. A professional corporation (PC or PA) is still a corporation; the professional-license overlay is extra state law, not a fifth basic entity type.

S corporation: a tax election with eligibility limits

An S corporation is not a different state entity. It is a corporation that has a valid election under Subchapter S of the Internal Revenue Code. The point of the election is pass-through treatment: profits and losses generally flow to shareholders, and the entity is not taxed as a C corporation.

Current eligibility limits you must know — and the only limits you should memorize unless a stem adds more:

• no more than 100 shareholders
• only one class of stock (voting and nonvoting shares can still be one class if distribution and liquidation rights are identical)
• only eligible shareholders (typically U.S. individuals and certain estates and trusts; partnerships, corporations, and nonresident aliens are the classic ineligible owners)

Do not invent extra limits (a made-up minimum number of shareholders, a random passive-income percentage as a formation rule, or “articles of S corporation” at the secretary of state). The state still sees a corporation. The IRS sees an S election (Form 2553 in practice; the exam wants the concept, not the form number trivia).

Piercing the veil (conceptually)

Limited liability is the default for corporations and LLCs. A court may pierce the corporate veil (or treat the entity as the owner’s alter ego) and reach personal assets when the entity is a sham. Classic factors: commingling personal and entity funds, undercapitalization at the start, ignoring formalities, and using the entity to commit fraud or an injustice. Piercing is exceptional and fact-specific. Many courts apply a similar idea to LLCs. The exam will not ask you to brief a famous piercing case. It will ask whether ignoring the corporate trail matters. It does.

Which entity does the fact pattern describe?

Worked path. Ana bakes cakes from her kitchen and deposits receipts in her personal account. Sole proprietorship. Ana and Ben share profits from a food truck and never file anything. General partnership — joint and several liability. They later file articles of organization, call themselves members, and sign an operating agreement. LLC. They then incorporate, issue stock, elect a board, and do not make an S election. C corporation (double tax conceptually). They file a timely S election and have 40 individual U.S. shareholders and one class of stock. S corporation.

Trap. “We formed an S-LLC at the secretary of state.” Most secretaries of state form corporations and LLCs. S is tax. “Shareholders of the LLC” is the wrong noun. “LLC members have unlimited liability just like partners” is wrong unless a guarantee or veil-piercing stem says otherwise. “A written partnership agreement is required or there is no partnership” is wrong.

Term-swap. Joint and several is partnership language. Double tax is C-corporation language. Operating agreement is LLC language. One class of stock / 100 shareholders / eligible shareholders is S-corporation language. Define the noun before you pick.