Business Entity Comparison for the CPA Exam
The REG section of the CPA exam heavily tests business entity selection and taxation. You must understand the formation, taxation, liability, and operational differences between entity types. This cheat sheet provides a side-by-side comparison.
Entity Types at a Glance
| Feature | Sole Proprietorship | Partnership (General) | S Corporation | C Corporation | LLC |
|---|
| Tax Form | Schedule C (Form 1040) | Form 1065 (K-1s issued) | Form 1120-S (K-1s issued) | Form 1120 | Depends on election |
| Taxation Level | Individual only | Pass-through (individual) | Pass-through (individual) | Double (entity + shareholder) | Flexible (default varies) |
| Self-Employment Tax | Yes (all net earnings) | Yes (general partners) | No (on distributions); Yes (on reasonable salary) | No (salary is W-2) | Depends on classification |
| Liability Protection | None (unlimited) | Unlimited (general partners) | Limited to investment | Limited to investment | Limited to investment |
| Owners | 1 | 2+ partners | Max 100 shareholders | Unlimited | 1+ members |
| Owner Restrictions | None | None | Only US citizens/residents, individuals, certain trusts; one class of stock | None | None |
| Basis Includes Debt? | N/A | Yes (all entity debt) | Only direct shareholder loans | No basis concept for distributions | Depends on classification |
S Corporation Eligibility Requirements
- Domestic corporation
- No more than 100 shareholders (family members can elect to be treated as one)
- Only one class of stock (voting rights can differ)
- Shareholders must be individuals, estates, certain trusts, or tax-exempt organizations (no partnerships, corporations, or nonresident aliens)
- Must not be an ineligible corporation (certain financial institutions, insurance companies, DISCs)
- All shareholders must consent to the S election
Partnership Taxation Essentials
| Concept | Rule |
|---|
| Formation | Generally tax-free under §721 (no gain/loss on contribution of property for partnership interest) |
| Partner's Basis | Cash contributed + Adjusted basis of property contributed + Share of partnership liabilities − Distributions received |
| Distributive Share | Allocated per partnership agreement; must have substantial economic effect |
| Guaranteed Payments | Payments to partners for services/capital, determined without regard to income; deductible by partnership, ordinary income to partner |
| Distributions | Generally tax-free to extent of basis; excess is capital gain |
| Separately Stated Items | Capital gains/losses, §1231 gains, charitable contributions, tax-exempt income, foreign taxes (flow through character to partners) |
C Corporation Double Taxation
| Level | Tax | Rate |
|---|
| Corporate level | Corporate income tax on taxable income | 21% flat rate (TCJA) |
| Shareholder level | Tax on dividends when distributed | 0%, 15%, or 20% qualified dividend rate (+ 3.8% NIIT if applicable) |
Shareholder Basis: S Corporation vs. Partnership
| Item | S Corp Shareholder | Partner |
|---|
| Initial basis | Cash + FMV of property contributed | Cash + Adjusted basis of property contributed |
| Increased by | Share of income; additional contributions | Share of income; additional contributions; share of entity debt |
| Decreased by | Distributions; share of losses; nondeductible expenses | Distributions; share of losses; nondeductible expenses; decrease in share of debt |
| Entity debt in basis? | Only direct shareholder loans to the corp | Yes (share of all partnership liabilities) |
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