Figures: tax year 2026
State law determines when a business entity exists, who manages it, and whether its owners bear personal liability. The comparisons summarize the legal characteristics that distinguish ownership, economic rights, decision-making, and continuity among business forms.
- The partnership discussion uses revised uniform partnership rules, which recognize the partnership as an entity separate from its owners.
- Limited-partnership and limited-liability-company rules follow the modern uniform approaches identified in Standards, with older rules distinguished where the difference affects liability.
- State enactments can vary. A stated jurisdictional rule controls, and a valid agreement replaces statutory defaults only where the statute permits modification.
- Mandatory protections, including creditors' rights and statutory limits on contractual changes, cannot be displaced merely by agreement among owners.
A limited liability company (LLC) is a state-created entity whose owners generally receive limited liability. Its federal income tax classification follows separate rules and elections, without determining whether the state-law liability shield exists.
- A domestic LLC with one owner generally defaults to treatment as an entity disregarded as separate from that owner for federal income tax purposes.
- A domestic LLC with multiple owners generally defaults to partnership treatment, while an eligible LLC can elect corporate treatment.
Common mistakes
- Trade name supplies protection. A license or assumed-name filing does not perform the formation function of effective organizational articles.
- Capital controls every entitlement. Jun's larger contribution does not override Alder Workshop's equal default allocation or equal management rights.
- Participation automatically destroys protection. Limited-partner control requires the supplied statutory regime and, under the older rule, the relevant reasonable-belief conditions.
Bottom line
- Sole proprietorships lack separate legal personality, while revised uniform partnerships are separate entities despite general partners' personal exposure.
- Statutory liability protection requires effective formation or qualification and does not erase personal misconduct, guarantees, or existing personal obligations.
- Default profits, distributions, voting rights, and transfer rights depend on the entity form and governing statute, with permitted agreement overrides.
- Public filings create or qualify statutory forms; internal agreements and bylaws govern operations, and federal tax elections serve a separate function.
Exam shortcut
Identify the requested legal consequence first: existence, personal liability, management, transfer, or termination. Then locate the governing statute and any valid agreement override. Put the obligation date beside the filing's effective date. A submitted document, intended election, or future formation plan may not establish protection when the obligation arises. Treat contribution amounts as inputs to a specified rule.
The full lesson (about 6,359 words, 42 min read) adds 6 worked examples, all 6 common mistakes, a self-check, free in the app.
Learning objectives
- II.E1
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