Business Organizations for the CP Exam

Business organizations is a tested content area on the NALA Certified Paralegal exam. Paralegals in corporate practice handle entity formation, governance, compliance, and dissolution. This guide compares the major business entity types.

Sole Proprietorships

The simplest form of business organization, a sole proprietorship is a business owned and operated by one person:

Formation: No formal filing is required to create a sole proprietorship. It exists automatically when an individual begins conducting business.
Liability: The owner has unlimited personal liability for all business debts and obligations. There is no separation between the owner and the business.
Taxation: Business income is reported on the owner's personal tax return (Schedule C). The business is not taxed separately.
Advantages: Simple to create, full control, minimal regulatory requirements
Disadvantages: Unlimited personal liability, difficulty raising capital, limited lifespan (ends when the owner dies or stops doing business)

General Partnerships

A general partnership is an association of two or more persons carrying on as co-owners of a business for profit. Under the Uniform Partnership Act (UPA) and the Revised Uniform Partnership Act (RUPA):

Formation: No formal filing is required. A partnership can be formed by oral agreement, written agreement, or by conduct.
Liability: All general partners have joint and several liability for partnership debts. Each partner is personally liable for the full amount of any partnership obligation.
Authority: Every partner is an agent of the partnership. Acts carried out in the ordinary course of business bind the partnership.
Profit Sharing: Profits and losses are shared equally unless the partnership agreement provides otherwise
Fiduciary Duties: Partners owe each other duties of loyalty and care
Dissociation and Dissolution: A partner may dissociate (withdraw) from the partnership. Dissolution occurs when a partner's departure triggers the winding up of partnership affairs.

Limited Partnerships (LP)

A limited partnership has at least one general partner and one or more limited partners:

Formation: Requires filing a certificate of limited partnership with the state
General Partners: Manage the business and have unlimited personal liability
Limited Partners: Contribute capital and share in profits but do not participate in management. Their liability is limited to their investment.
Control Rule: Under traditional rules, a limited partner who participates in management may lose their limited liability protection. Modern statutes have relaxed this rule considerably.

Limited Liability Partnerships (LLP)

An LLP provides personal liability protection to all partners:

Formation: Requires filing with the state and typically annual renewal
Liability: Partners are not personally liable for the negligence or misconduct of other partners. However, each partner remains personally liable for their own acts.
Common Use: LLPs are widely used by professional firms (law firms, accounting firms, medical practices)

Corporations

A corporation is a separate legal entity created under state law. Key concepts include:

Formation: Requires filing articles of incorporation (or a charter) with the state. The articles must include the corporation's name, purpose, number of authorized shares, and registered agent.
Bylaws: Internal rules governing the corporation's operations, including meetings, voting, officers, and committees
Limited Liability: Shareholders' liability is limited to their investment. The corporate "veil" protects personal assets from corporate debts.
Piercing the Corporate Veil: Courts may disregard the corporate entity and hold shareholders personally liable when the corporation is an alter ego of the shareholder (commingling funds, not observing formalities, undercapitalization, fraud)
Fiduciary Duties: Directors and officers owe duties of care and loyalty to the corporation and its shareholders. The business judgment rule protects directors who make informed, good-faith decisions.
Shareholder Rights: Right to vote, right to dividends (when declared), right to inspect books and records, and preemptive rights (in some states)
Types: C corporations (double taxation at corporate and shareholder level) and S corporations (pass-through taxation, limited to 100 shareholders)

Limited Liability Companies (LLCs)

The LLC combines features of corporations and partnerships:

Formation: Requires filing articles of organization with the state
Operating Agreement: The governing document that sets forth management structure, profit distribution, voting rights, and other terms
Liability: Members have limited liability protection similar to corporate shareholders
Taxation: Default pass-through taxation (like a partnership), but may elect to be taxed as a corporation
Management: Member-managed (all members participate in management) or manager-managed (designated managers run the business)
Flexibility: The operating agreement can be customized extensively to suit the members' needs

Comparison Table

When studying for the CP exam, be able to compare these entities across key dimensions: formation requirements, personal liability, management structure, taxation, transferability of interests, and duration. Practice identifying which entity type is most appropriate for given fact patterns. Use our flashcard system to reinforce your knowledge. Sign up free to access all study materials.

Business Organizations: Corporations, LLCs, and Partnerships