Figures: tax year 2026
Entity selection begins with legal feasibility because ownership rights and liability exposure can eliminate an otherwise attractive tax alternative. The adviser must identify the type of business described before calculating its formation or liquidation consequences.
A limited partnership (LP), limited liability partnership (LLP), and limited liability company (LLC) are distinct state-law forms. Their federal income tax classification requires a separate determination.
The matrix assumes ordinary domestic entities and applicable state-law permissions.
Exhibit one. FreeFellow original legal intake dossier.
Three consultants want to retain partnership management while obtaining protection from claims caused solely by another owner's malpractice. Each consultant expects to remain responsible for personal work. The jurisdiction permits their profession to register an LLP and supplies the described liability shield.
To identify the type of business that satisfies Exhibit one's requirements, the adviser selects an LLP. Its statutory shield addresses claims caused solely by another consultant's malpractice, while active partnership management continues and responsibility for personal work remains.
Common mistakes
- Economic ownership substituted for control. Example 2 retains 80% economic ownership but only 79% voting power, producing $120,000 of recognized corporate-transfer gain.
- Liability allocation omitted. Subtracting Example 1's entire $40,000 debt without adding Marin's $20,000 partnership allocation understates outside basis by $20,000.
- Asset gains and losses netted. Example 3's net economic loss of does not eliminate the $18,000 boot-triggered gain.
Bottom line
- State-law form determines legal rights and liability exposure; federal tax classification requires a separate determination.
- Corporate contribution nonrecognition requires qualifying property transferors to hold at least 80% voting power and 80% of each nonvoting class.
- Corporate boot recognition is asset-specific, ordinary liability assumptions generally reduce stock basis, and excess liabilities can trigger gain.
- Partnership contributions generally require no control percentage, and outside basis reflects both liability relief and supported liability allocations.
Exam shortcut
Start with the ownership documents. Separate economic percentages, voting power, each nonvoting class and property-only versus service-only recipients. Mark each liability once. For a partnership, reconcile original relief to the supported ending allocation before testing deemed cash against basis. Build an asset row before an entity total. Allocate boot first, recognize gain by asset, and apply aggregate corporate loss-basis restrictions afterward.
The full lesson (about 7,020 words, 47 min read) adds 6 worked examples, all 6 common mistakes, a self-check, free in the app.
Learning objectives
- III.A1
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