2026 CLFP Recertification

Before engaging in equipment finance transactions, it is crucial for equipment lessors and lenders to understand the type of business entity involved.  This knowledge impacts various aspects of the transaction, including:

• Credit Application: The business type influences the financial and credit information required and the level of due diligence during underwriting.
• UCC Filing: Filing rules vary by entity type.
• Documentation: The entity type determines the type of documentation used and the authorization and signing requirements.
• Compliance: Different entities have distinct regulatory, licensing, tax, and legal requirements.
• Bankruptcy Procedures: Entity type dictates the procedures followed in case of customer bankruptcy.

Common Business Entities: There are several common types of business entities involved in equipment finance transactions, as further outlined.

Corporations: Corporations are separate legal entities from their owners (i.e., shareholders). Shareholders’ liability is limited to their investment plus any personally guaranteed debts. They are governed by bylaws and Articles of Incorporation, which control transaction authorization and document execution.

The primary forms of corporations include:

• C Corporation: The basic corporate form with no limit on the number of shareholders. Profits are taxed at the corporate level, and distributions to shareholders are also taxed.
• S Corporation: Elects to be taxed like a partnership under IRS guidelines. IRS regulations limit shareholder numbers and types. Profits and losses flow to individual shareholders’ tax returns.
• Non-profit Corporation: Formed to provide services like hospitals or charities, not profit-oriented. Known as 501(c)(3) or 501(c)(6) entities.
• Professional Corporation (PC): For specific professions like physicians, dentists, and attorneys, offering tax and pension benefits and limiting personal liability for business matters.

Limited Liability Companies (LLCs): Similar to Sub “S” corporations, profits or losses flow through to the owners’ tax returns. LLC owners can be individuals or corporations, and there is no limit on the number of owners. Operating Agreements govern LLCs and can be managed by managers or members (i.e., owners) directly. It is crucial to determine who has the authority to bind the LLC to agreements. LLC members have no personal liability unless they personally guarantee the LLC’s debts.

Partnerships: Involve two or more parties doing business together. General partnerships may not require formal agreements or registration, and all partners are liable for partnership debts.

Limited Partnerships (LP): Limited partnerships have general partner(s) liable for debts and limited partner(s) protected from liability.

Limited Liability Partnerships (LLPs): General partnerships modified to provide liability protection like LLCs. They operate under partnership agreements and offer partners protection from LLP debts.

Sole Proprietorships: The simplest business entities, owned by one individual. They require minimal legal formalities, and business income is reported on the owner’s personal tax return.

Other Business Entities: Include joint ventures, associations, and trusts. Joint ventures are formed for specific projects, associations are typically non-profit organizations, and trusts hold assets for beneficiaries. Each entity type has unique characteristics and requirements for equipment finance transactions.

Municipalities: Local government entities like states, cities, counties, or school districts. Municipalities typically cannot commit to leases or loans for more than one year. Still, longer-term obligations may include “fiscal funding clauses” allowing cancellation if funds are not appropriated in future budgets.

Federal Government: Can borrow funds as needed and issue long-term bonds. They generally avoid long-term lease obligations but may commit to multi-year leases in some cases. Different agencies have varied methods for leasing equipment

For more information on Business Entities, please review Chapter 2 – Leasing Law of the CLFP Handbook (10th edition).