Understanding Business Structures for CPA REG
As a Certified Public Accountant (CPA), understanding the various business structures is fundamental. This knowledge is crucial for advising clients on formation, taxation, liability, and operational considerations. This module will cover the key characteristics of common business structures relevant to the CPA REG exam.
Sole Proprietorship
The simplest form of business organization, a sole proprietorship is owned and run by one individual, and there is no legal distinction between the owner and the business. This structure offers simplicity but also exposes the owner to unlimited personal liability.
Partnership
A partnership is a business owned by two or more individuals. Like sole proprietorships, general partnerships typically involve unlimited liability for the partners.
| Feature | General Partnership | Limited Partnership (LP) |
|---|---|---|
| Liability | Unlimited personal liability for all partners | General partners have unlimited liability; limited partners have liability limited to their investment |
| Management | All partners can participate in management | Only general partners manage; limited partners are passive investors |
| Taxation | Pass-through taxation (reported on partners' personal returns) | Pass-through taxation |
| Formation | Relatively easy, often by agreement | Requires formal filing with the state |
Corporation
A corporation is a legal entity separate and distinct from its owners (shareholders). This separation provides significant advantages, primarily limited liability.
S Corporation vs. C Corporation
| Feature | C Corporation | S Corporation |
|---|---|---|
| Taxation | Separate tax entity; subject to corporate income tax (double taxation possible) | Pass-through taxation; profits/losses reported on shareholders' personal returns |
| Shareholder Limits | No limit on number or type of shareholders | Limited to 100 shareholders, who must be U.S. citizens or residents, certain trusts, or estates |
| Stock Classes | Can have multiple classes of stock | Generally only one class of stock allowed |
Limited Liability Company (LLC)
An LLC combines features of partnerships and corporations, offering limited liability to its owners (members) while allowing for pass-through taxation.
Key Considerations for CPA REG
When preparing for the CPA REG exam, focus on the following distinctions:
Sole Proprietorship and General Partnership.
Limited liability for its owners (shareholders).
Limited Liability Company (LLC).
Remember to differentiate between the legal structure and the tax election for entities like LLCs and partnerships, as this is a common area tested on the REG exam.
Dual Coding: Visualizing Business Structure Differences
This diagram illustrates the core differences in liability and taxation across common business structures. Notice how sole proprietorships and general partnerships have direct links between the owner and business liabilities and profits. Corporations, on the other hand, are depicted as separate entities with a distinct legal shield. LLCs are shown as a hybrid, offering the shield of a corporation with the flexibility of pass-through taxation.
Text-based content
Library pages focus on text content
Learning Resources
Official overview of the Regulation section of the CPA exam, detailing the content areas including business structures.
The U.S. Small Business Administration provides a clear guide to different business structures, their pros, and cons.
A comprehensive article explaining various business structures with a focus on financial and legal implications.
A video tutorial breaking down the key aspects of different business structures relevant to the CPA REG exam.
Official IRS guidance on business structures, focusing on tax implications for each type.
Detailed information on the legal and operational aspects of Limited Liability Companies.
Cornell Law School's Legal Information Institute provides an overview of partnership law and its variations.
Cornell Law School's Legal Information Institute offers a foundational understanding of corporate law.
An in-depth video course covering business structures for the CPA REG exam, including detailed examples.
While focused on FAR, this document often contains foundational business law concepts that are relevant to REG, especially regarding entity formation and accounting treatment.