Why Entity Types Matter for Paralegals

Corporate paralegals spend a large share of their time forming entities, preparing annual reports, maintaining minute books, and supporting transactions. Certification exams reflect this reality by testing the differences among business structures. Every entity type involves tradeoffs among liability protection, taxation, formality, and control. This guide compares the major forms so you can answer comparison questions confidently.

Sole Proprietorship

A sole proprietorship is the simplest form: one individual conducts business in their own name or under a trade name. There is no legal separation between owner and business.

Formation: No filing is needed to create it, though a "doing business as" (DBA) registration is usually required if a trade name is used, plus any local licenses.
Liability: Unlimited personal liability for all debts and torts.
Taxation: Pass-through. Income is reported on the owner's personal return (Schedule C) and subject to self-employment tax.
Continuity: The business ends when the owner dies or stops operating.

General Partnership

A general partnership is an association of two or more persons carrying on a business for profit as co-owners. It can be formed without any filing, even by handshake, though a written partnership agreement is strongly recommended.

Liability: Partners are jointly and severally liable for partnership obligations.
Agency: Each partner is an agent of the partnership and can bind it in the ordinary course of business.
Taxation: Pass-through. The partnership files an informational return (Form 1065) and issues Schedule K-1 forms to partners.

What Is the Difference Between a Limited Partnership and an LLP?

A limited partnership (LP) has at least one general partner with unlimited liability and one or more limited partners whose liability is capped at their investment, provided they do not participate in control. An LP requires a state filing. A limited liability partnership (LLP) protects all partners from liability for the partnership's debts and for the wrongdoing of other partners, and is common among professional firms such as law and accounting practices.

Limited Liability Company

The LLC combines liability protection with flexibility. Owners are called members, and management may be by members or by appointed managers.

Formation: File articles of organization with the Secretary of State. An operating agreement governs internal affairs.
Liability: Members are generally not personally liable for company debts, though personal guarantees and veil piercing can create exposure.
Taxation: By default, a single member LLC is disregarded and a multi-member LLC is taxed as a partnership. An LLC may elect to be taxed as a corporation.

C-Corporation

A corporation is a separate legal entity owned by shareholders, governed by a board of directors, and operated by officers. It is the most formal structure.

Formation: File articles of incorporation, adopt bylaws, hold an organizational meeting, appoint directors, issue stock, and maintain minutes.
Liability: Shareholders are generally liable only up to their investment.
Taxation: Double taxation. The corporation pays tax on profits, and shareholders pay tax again on dividends.
Continuity: Perpetual existence unless dissolved.
Raising capital: Easiest structure for issuing multiple classes of stock and attracting investors.

S-Corporation

An S-corporation is not a different type of entity under state law. It is a tax election made under Subchapter S of the Internal Revenue Code by filing Form 2553. A corporation or an LLC can make this election if it qualifies.

What Are the S-Corp Eligibility Requirements?

No more than 100 shareholders.
Only one class of stock.
Shareholders must be individuals, certain trusts, or estates. Partnerships, corporations, and nonresident aliens generally cannot be shareholders.
The company must be a domestic entity.

The benefit is pass-through taxation, avoiding double taxation, while retaining the liability protection of a corporation. Owner-employees must still receive reasonable compensation subject to payroll taxes.

Other Entities Worth Knowing

Professional corporation (PC) and professional LLC (PLLC): Used by licensed professionals. Owners remain liable for their own malpractice.
Nonprofit corporation: Organized for charitable or other exempt purposes. Seeking 501(c)(3) status requires an application to the IRS.
Benefit corporation: A for-profit entity that also pursues a stated public benefit.

Quick Comparison

Liability protection: None in sole proprietorships and general partnerships. Present in LLCs, corporations, and LLPs.
Taxation: Pass-through for sole proprietorships, partnerships, LLCs by default, and S-corps. Entity level tax for C-corps.
Formalities: Lowest for sole proprietorships, highest for corporations.

What Is Piercing the Corporate Veil?

Courts may disregard the entity and hold owners personally liable when they treat the entity as an alter ego. Common factors include commingling funds, undercapitalization, ignoring corporate formalities, and using the entity to commit fraud. Good record keeping by paralegals directly supports liability protection.

Typical Paralegal Duties

Checking name availability and reserving names.
Preparing articles of incorporation or organization.
Obtaining an EIN from the IRS.
Drafting bylaws, operating agreements, and consent resolutions.
Maintaining stock ledgers and filing annual reports.

Put It Into Practice

Comparison charts are one of the fastest ways to learn this material. Use our paralegal flashcards to drill liability and tax treatment for each entity, then register at ParalegalPrep signup to try practice questions. When you are ready for the complete study system, see the pricing page for plan details.

Types of Business Entities: Sole Proprietorship to S-Corp