Sole Proprietorships and Partnerships: REG CPA Exam Prep
This module covers the fundamental aspects of Sole Proprietorships and Partnerships, crucial for the Regulation (REG) section of the CPA Exam. Understanding their formation, operation, taxation, and dissolution is key to mastering this area.
Sole Proprietorships
A sole proprietorship is the simplest business structure, owned and run by one individual. There is no legal distinction between the owner and the business.
Business income is reported on the owner's personal tax return (Schedule C of Form 1040) and taxed at individual income tax rates.
Partnerships
A partnership is a business arrangement between two or more individuals who agree to share in the profits or losses of a business. Like sole proprietorships, general partnerships typically involve unlimited liability for the partners.
| Feature | Sole Proprietorship | General Partnership |
|---|---|---|
| Number of Owners | One | Two or more |
| Liability | Unlimited personal liability | Unlimited personal liability for each partner |
| Taxation | Pass-through to owner's personal return (Schedule C) | Pass-through to partners' personal returns (Schedule K-1) |
| Formation | Automatic upon starting business | Can be formed by agreement (written or oral), or by conduct |
Types of Partnerships
Beyond the general partnership, other forms exist, offering different liability structures. For the REG exam, understanding the distinctions between General Partnerships (GP), Limited Partnerships (LP), and Limited Liability Partnerships (LLP) is crucial.
Partnership Taxation
Partnerships are pass-through entities for tax purposes. This means the partnership itself does not pay income tax. Instead, profits and losses are passed through to the individual partners, who report them on their personal tax returns.
The flow of income and deductions from a partnership to its partners is a core concept. Each partner receives a Schedule K-1, which details their share of the partnership's income, deductions, credits, and other tax items. These items are then reported on the partner's Form 1040. This pass-through taxation avoids the double taxation often associated with C-corporations.
Text-based content
Library pages focus on text content
Schedule K-1
Formation and Dissolution
Forming a sole proprietorship is generally automatic. Partnerships can be formed by agreement, written or oral, or even by the conduct of the parties. Dissolution can occur due to various events, including the withdrawal of a partner, bankruptcy, or mutual agreement, and involves winding up the business affairs.
For CPA exam purposes, pay close attention to the specific rules governing partnership dissolution and the order of asset distribution.
Key Takeaways for CPA REG
Mastering sole proprietorships and partnerships involves understanding their legal structure, liability implications, and tax treatment. Focus on the differences between general and limited partnerships, and the pass-through nature of partnership taxation.
Learning Resources
Official IRS guidance on operating a sole proprietorship, including tax implications and requirements.
IRS information on partnerships, covering formation, operation, and tax reporting for partners.
An explanation of Schedule K-1, a critical document for partners reporting their share of partnership income and losses.
A video tutorial breaking down partnership concepts relevant to the CPA REG exam, including formation and taxation.
An overview of general partnerships, their characteristics, and how they function in business.
Details on the structure and implications of limited partnerships, including the roles of general and limited partners.
An explanation of Limited Liability Partnerships, focusing on the liability protection they offer to partners.
A video tutorial specifically covering sole proprietorships for the CPA REG exam, highlighting key tax and legal aspects.
Guidance from the Small Business Administration comparing different business structures, including sole proprietorships and partnerships.
A comprehensive overview of partnership law, covering various types of partnerships and their legal frameworks.