U.S. Unincorporated Business Organizations Quiz

Answer: True

All five of the primary types of unincorporated business organizations in the U.S. are treated as having pass-through tax status by default. This means all profits pass through to the owners, who then pay taxes on them as personal income. However, all of these organizations except sole proprietorships have the option to check a box on their federal forms to be treated as a corporation for tax purposes if they so choose. Normally, it is a disadvantage to be taxed as a corporation, but in some cases, a business organization may find the choice advantageous.

Even though they have pass-through tax status, partnerships still have to file a U.S. Return of Partnership Income to report the partnership's income so the IRS can tell if the individual partners have accurately reported their share of business income on their personal tax returns.

Corporations, unlike unincorporated businesses, are subject to "double taxation," meaning the corporation's profits are taxed to the corporation when earned, and then they are taxed again when distributed to the shareholders.

Answer: Either a sole proprietorship or a limited liability company (LLC)

A sole proprietorship always has only one owner (as indicated by the word "sole"). An LLC may also have only one owner, or it may have multiple owners. Partnerships, as implied by the word "partner," must have two or more owners.

Answer: False

An EIN is an Employer Identification Number. A sole proprietor is only required to obtain an EIN if he or she has employees. However, partnerships or LLCs that "check the box" on their IRS tax forms to be treated as corporations for tax purposes must get an EIN even if they don't have any employees.

Answer: True

In Kentucky, Minnesota, North Dakota, and Tennessee, LLCs can operate as nonprofits. In Texas, they can operate as an "LLC with a nonprofit purpose."

Answer: Lousiana

This act was proposed by the National Conference of Commissioners on Uniform State Laws to make it easier to operate partnerships across states. Louisana was the only state not to adopt it in 1914. Today, many states have instead adopted the Revised Uniform Partnership Act (RUPA), while others still rely on the UPA. Louisiana remains a hold out, not having adopted either RUPA or UPA as of 2024. RUPA and UPA state default rules where partnership agreements are silent, and these acts also specify things partnerships cannot do.

Answer: partnership at will

A partnership at will is a risky arrangement, as it can be dissolved at any time by one partner serving notice on the other partners. Often, a partnership agreement will stipulate circumstances under which a partner may withdraw, and if a partner withdraws in violation of those circumstances, he or she may be liable for damages.

Answer: Limited partnership (LP)

A limited partnership consists of one or more general partners and one or more "silent" or limited partners. Either a limited partnership or a general partnership can convert to a limited liability partnership, so an LLP might not necessarily have any silent partners, if it was previously a general partnership.

Answer: Limited partnerships (LPs) and limited liability companies (LLCs)

In LLPs and general partnerships, the partners share profits and losses equally rather than in proportion to their contributions. In LPs and LLCs, however, the owners share in accordance with their capital contributions.

Answer: Limited partnerships (LPs)

One disadvantage of an LP is that the limited partners cannot be involved in management; only the general partners can. This disadvantage gave rise to LLPs, in which all partners share equally in management. In an LLC, all members may share equally in management, or the LLC can elect to have a manager manage it.

A limited partnership that converts to a limited liability partnership is sometimes called a limited liability limited partnership (LLLP).

Answer: Low-profit LLCs (L3Cs)

As of 2024, statutes allowing for L3Cs existed in ten U.S. states, Puerto Rico, and the federal jurisdictions of certain Native American tribes. These businesses have a primary social purpose but, unlike nonprofits, are able to retain profits.

Answer: Domestication

A merger is when two businesses combine and one is extinguished. An entity conversion is when a business transforms from one type of entity (such as a general partnership) to another (such as a limited liability partnership). Teleportation is currently unavailable to us.

Answer: Limited liability company (LLC)

Owners of LLCs in all 50 states have no personal liability for the wrongdoing of other owners or for the business's debts or contractual obligations. Sole proprietorships, by contrast, have unlimited personal liability for both, and general partnerships have unlimited joint and several liability.

LPs do not offer liability protection to their general partners, only to their limited partners, so it cannot be said that "all partners" enjoy these protections in a limited partnership.

While certain types of business organizations may limit the personal liability of an owner for the wrongdoings of his or her partners or fellow members, the individual is always responsible for his or her own torts. Likewise, the business itself is always responsible for its own debts and contractual obligations.

Answer: members

Owners of an LLC are called "members." An LLC cannot issue shares of stock and therefore does not technically have "shareholders." An LLC can issue "membership units," which is a similar concept to stock. Or it can, like a partnership, list ownership percentages in its operation agreement.

Answer: UPA

Under the Uniform Partnership Act (UPA), the withdrawal of any partner for any reason results in the end of the partnership. This was seen by many as a disadvantage of UPA and was therefore modified in the Revised Uniform Partnership Act (RUPA). In RUPA states, a withdrawal usually only triggers a buyout by the other partners.

Answer: partial-shield

LLPs in "full-shield" states have protection from both types of personal liability, but in "partial-shield" states, they may be held personally liable for the debts and contractual obligations of the partnership. As of 2024, Louisiana and South Carolina were the only two partial-shield states.