source:
  type: guide
  id: fnma-sel-b3-3.5-02
  authority: Fannie Mae Selling Guide B3-3.5-02 — Business Structures
  description: Fannie Mae Selling Guide B3-3.5-02 — Business Structures.
  coverage_tier: operative
obligations:
- id: fnma-sel-b3-3.5-02-full
  canonical_id: fnma-sel-b3-3.5-02-full
  section: Fannie Mae Selling Guide B3-3.5-02 — Business Structures
  type: do
  tags:
  - regulator-direct
  - fnma
  - selling-guide
  - corpus-expansion
  - tier-operative
  primary_source:
    tier: 1
    authority: Fannie Mae Selling Guide B3-3.5-02 — Business Structures
    source_class: fnma-guide
    source_url: https://singlefamily.fanniemae.com/media/document/pdf/selling-guide
    snapshot_id: 5f7b8b79da595d76
    fetched_at: '2026-05-25T14:09:57Z'
    content_hash: sha256:98cf85a02861bbe84914a0e339b327c8fc131869a8a573882007bbeea60c5701
    paragraph_quote: 'B3-3.5-02, Business Structures (12/16/2014) Introduction This
      topic contains information on various types of business structures, including:
      Overview Sole Proprietorships Partnerships Limited Liability Companies S Corporations
      Corporations Overview The legal structure of a business determines the following:
      the way business income or loss is reported to the IRS, the taxes that are paid,
      the ability of the business to accumulate capital, and the extent of the owner’s
      liability. There are ﬁve principal business structures: sole proprietorships,
      partnerships, limited liability companies (LLCs), S corporations, and corporations.
      Knowledge of the structure of a self-employed borrower’s business will assist
      the lender in analyzing and evaluating the stability of the business and the
      degree of the borrower’s Published May 6, 2026 367 involvement. Note: Refer
      to B3-3.5-03, IRS Forms Quick Reference, for a summary of the IRS forms referenced
      in this section and their full titles. Sole Proprietorships A sole proprietorship
      is an unincorporated business that is individually owned and managed. The individual
      owner has unlimited personal liability for all debts of the business. If the
      business fails, the borrower not only will have to replace their lost income,
      but also will be expected to satisfy the outstanding obligations of the business.
      Since no distinction is made between the owner’s personal assets and the assets
      used in the business, creditors may take either (or both) to satisfy the borrower’s
      business obligations. The ﬁnancial success or failure of this type of business
      depends solely on the owner’s ability to obtain capital and to manage the various
      aspects of the business. Poor management skills or an inability to secure capital
      to keep the business running will compromise the continuance of the borrower’s
      business (and income). The owner’s death terminates the business and may cause
      the assets to be placed into probate, thus delaying the disposition of the assets
      to creditors and heirs. The income, expenses, and taxable proﬁts of a sole proprietorship
      are reported on the owner’s IRS Form 1040, Schedule C, and are taxed at the
      tax rates that apply to individuals. (See B3-3.6-03, Income or Loss Reported
      on IRS Form 1040, Schedule C.) When evaluating a sole proprietorship, the lender
      must: review the owner’s most recent signed federal income tax returns to ensure
      that there is suﬃcient and stable cash ﬂow to support both the business and
      the payments for the requested mortgage, and determine whether the business
      can accommodate the withdrawal of assets or revenues should the borrower need
      them to pay the mortgage payment and/or other personal expenses. Partnerships
      A partnership is an arrangement between two or more individuals who have pooled
      their assets and skills to form a business and who will share proﬁts and losses
      according to predetermined proportions that are set out in the partnership agreement.
      A partnership may be either a general partnership or a limited partnership:
      General Partnership — Under a general partnership, each partner has responsibility
      for running the business, is personally liable for the debts of the entire business,
      and is responsible for the actions of every other partner (unless otherwise
      speciﬁed in the partnership agreement). A general partnership is dissolved immediately
      on the death, withdrawal, or insolvency of any of the partners, although the
      personal liability to partnership creditors exists even after the partnership
      is dissolved. However, the partnership’s assets will ﬁrst be applied to the
      creditors of the business and the partners’ individual assets will be ﬁrst be
      applied to their personal creditors, with any surplus in a partner’s personal
      assets then being applied to the remaining business creditors. Limited Partnership
      — Under a limited partnership, a limited partner has limited liability based
      on the amount they invested in the partnership, does not typically participate
      in the management and operation of the business, and has limited decision-making
      ability. A limited partnership will have at least one Published May 6, 2026
      368 general partner who manages the business and is personally liable for the
      debts of the entire business. A limited partner’s death, withdrawal, or insolvency
      does not dissolve the partnership. Because limited partnerships often are formed
      as tax shelters, it is more likely that IRS Form 1065, Schedule K-1, will reﬂect
      a loss instead of income. In such cases, the borrower’s ability to deduct the
      loss will be limited by the “at risk” amount of their limited partnership interest
      (and will probably be subject to passive loss limitations). The partnership
      must report its proﬁt or loss on IRS Form 1065 and each partner’s share of the
      proﬁt or loss on IRS Form 1065, Schedule K-1; however, the partnership pays
      no tax on the partnership income. Each partner uses the information from IRS
      Form 1065, Schedule K-1, to report their share of the partnership’s net proﬁt
      or loss (and special deductions and credits) on their IRS Form 1040—whether
      or not the partner receives a cash distribution from the partnership. Individual
      partners pay taxes on their proportionate share of the net partnership income
      at their individual tax rates. To quantify the level of the borrower’s ﬁnancial
      risk, the lender must: determine whether the borrower has guaranteed any loans
      obtained by the partnership (other than loans that are considered as nonrecourse
      debt or qualiﬁed nonrecourse debt), determine if the borrower received a distribution
      from the partnership, and determine the borrower’s share of non-cash expenses
      that can be added back to the cash ﬂow of the partnership business. For additional
      information, see the following: B3-3.6-07, Income or Loss Reported on IRS Form
      1065 or IRS Form 1120S, Schedule K-1 B3-3.7-01, Analyzing Partnership Returns
      for a Partnership or LLC Limited Liability Companies A limited liability company
      (LLC) is a hybrid business structure that is designed to oﬀer its member-owners
      the tax eﬃciencies of a partnership and the limited liability advantages of
      a corporation. The member-owners of the LLC (or their assigned managers) can
      sign contracts, sell assets, and make other important business decisions. The
      LLC operating agreement may set out speciﬁc divisions of power among the member-owners
      (or managers). Although the member-owners generally have limited liability,
      there may be some instances in which they are required to personally guarantee
      some of the loans that the LLC obtains. Proﬁts from the operation of the LLC
      may be distributed beyond the pool of member-owners, such as by oﬀering proﬁt
      distributions to managers. The LLC may report its proﬁt or loss on IRS Form
      1065 or IRS Form 1120S with each member-owner’s share of the proﬁt or loss on
      Schedule K-1, IRS Form 1065 or IRS Form 1120S; however, the LLC pays no tax
      on its income. Each member-owner uses the information from Schedule K-1 to report
      their share of the LLC’s net proﬁt or loss (and special deductions and credits)
      on their individual IRS Form 1040, whether or not the member- owner receives
      a cash distribution from the LLC. Individual member-owners pay taxes on their
      proportionate share of the LLC’s net income at their individual tax rates. The
      lender must evaluate the LLC using IRS Form 1065 or IRS Form 1120S along with
      the Schedule K-1, as Published May 6, 2026 369 applicable, to determine the
      following: whether the borrower actually received a cash distribution from the
      LLC, since proﬁts may or may not be distributed to the individual member-owners;
      and whether the borrower has guaranteed any loans obtained by the LLC (other
      than loans that are considered as nonrecourse debt or qualiﬁed nonrecourse debt).
      For additional information, see the following: B3-3.6-07, Income or Loss Reported
      on IRS Form 1065 or IRS Form 1120S, Schedule K-1 B3-3.7-01, Analyzing Partnership
      Returns for a Partnership or LLC S Corporations An S corporation is a legal
      entity that has a limited number of stockholders and elects not to be taxed
      as a regular corporation. Business gains and losses are passed on to the stockholders.
      An S corporation has many of the characteristics of a partnership. Stockholders
      are taxed at their individual tax rates for their proportionate share of ordinary
      income, capital gains, and other taxable items. The ordinary income for an S
      corporation is reported on IRS Form 1120S, with each shareholder’s share of
      the income reported on IRS Form 1120S, Schedule K-1. Because this income from
      the distribution of corporate earnings may or may not be distributed to the
      individual shareholders, the lender must determine if the borrower received
      a cash distribution from the S corporation. The cash ﬂow of an S corporation
      is otherwise evaluated similarly to that of a regular corporation. For additional
      information, see the following: B3-3.6-07, Income or Loss Reported on IRS Form
      1065 or IRS Form 1120S, Schedule K-1 B3-3.7-02, Analyzing Returns for an S Corporation
      Corporations A corporation is a state-chartered legal entity that exists separately
      and distinctly from its owners (who are called stockholders or shareholders).
      It is the most ﬂexible form of business organization for purposes of obtaining
      capital. A corporation can sue; be sued; hold, convey, or receive property;
      enter into contracts under its own name; and does not dissolve when its ownership
      changes. There are two types of corporations—publicly owned (widely held) corporations
      and privately owned (closely held) corporations. Because more than 50% of the
      outstanding stock of a privately owned corporation is owned directly or indirectly
      by no more than ﬁve people, the corporation has little or no access to public
      funds and must raise capital through institutional ﬁnancing. Although legal
      control of the corporation rests with its stockholders, they typically are not
      responsible for the day-to-day operations of the business since they elect a
      board of directors to manage the corporation and delegate responsibility for
      the day-to-day operations to the directors and oﬃcers of the company. The Published
      May 6, 2026 370 distribution of proﬁts earned by the business is determined
      by the corporation’s board of directors or other entities that have a signiﬁcant
      ﬁnancial interest in the business. However, the proﬁts usually are ﬁltered down
      to the owners in the form of dividends. Since a stockholder is not personally
      liable for the debts of the corporation, losses are limited to their individual
      investment in the corporation’s stock. Corporations must report income and losses
      on IRS Form 1120 and pay taxes on the net income. The corporation distributes
      proﬁts to its shareholders in the form of dividends, which it reports on IRS
      Form 1099- DIV. The shareholders must then report the dividends as income on
      their individual IRS Form 1040. For additional information, see: B3-3.6-07,
      Income or Loss Reported on IRS Form 1065 or IRS Form 1120S, Schedule K-1 B3-3.7-03,
      Analyzing Returns for a Corporation Recent Related Announcements There are no
      recently issued Announcements related to this topic.'
  judgment: false
