In addition to individuals and married couples, there are many other potential client types. Because the goals of an organization are likely to be very different from those of an individual, you should be familiar with these other client types:
A sole proprietorship is a business organization that is unincorporated and has just one owner. The finances of the sole proprietor business and the owner are one and the same. The sole proprietor has unlimited liability and is responsible for all business debts. For tax purposes, all business income or losses flow through directly to the owner.
- Business partnership - all partners are equally responsible for business debts and share equally in business profits (which pass through to be reported on each partner's personal income tax return).
- Limited partnership - the general partner is responsible for managing the business and has unlimited liability for its debts, while the limited partners are not responsible for any of the debts.
- Family limited partnership - this arrangement is used primarily as a means of minimizing estate and gift taxes but must have a legitimate business purpose (such as managing investment real estate, family business, etc.).
The main advantage of all types of corporations is that the owners are not personally liable for the corporation's debts. There are three types:
- C Corporation - thesecorporations must pay corporate income tax on their income, and the owners pay personal income taxes on profits received as dividends (known as double taxation).
- S Corporation - this arrangement is suitable for small companies (no more than 100 shareholders) that want the legal protection of a corporation but the flow-through taxation of partnerships (corporate losses are applied to personal income tax returns).
- Limited Liability Corporation - this type of structure allows protection from debts but is taxed more like a sole proprietorship.
You are likely to be given a description of a new business and asked which type of corporation it most resembles. If the question states that losses are expected in the first years, "S Corporation" is the correct answer. If it is a single owner and losses are not mentioned but protection from liabilities is noted, "LLC" is usually the correct answer. (Sole proprietorship is usually the fourth choice.)
- Estates - an estate account is typically open only a short time, until the estate assets are distributed to beneficiaries. Consequently, long-term or speculative investments are usually not appropriate.
- Trusts - the IA must recommend investments that are suitable for the beneficiaries of the trust, not for the trustee.
Exam Tips and Tricks
Consider these sample exam questions about client types:
- Which business entity would provide a flow-through of business income or losses as well as limited liability to the owners?
- Sole Proprietorship
- General Partnership
- C Corporation
- S Corporation
The correct answer is "d" - only the S Corporation offers both these advantages.
- Which investments would be considered suitable for an estate account?
- Treasury bonds
- Money market fund
- Growth-stock mutual fund
The correct answer is "c", since Treasury bonds, growth-stock mutual funds and options are not suitable for an account with a short time horizon.
Current Status and Financial Goals
Small BusinessA sole proprietorship is an unincorporated business that has one owner who pays the taxes on the profits of that business.
TradingCould incorporating your business help protect it? Find out here.
TaxesUnderstand the tax implications of running a small business in California, and learn which state taxes apply based on business type.
TaxesLearn why Florida's tax laws make it an attractive place to start a small business, and understand the types of taxes a small business owner must pay there.
TaxesLearn the tax laws for small businesses in Oregon, and understand the different types of taxes small business owners face based on business type.
Small BusinessLimited liability is a legal concept that protects equity owners from personal losses due to their ownership interest in the company.
InvestingLearn about the advantages of forming an LLC over a corporation, including ease of administration. Read about the advantages that a corporation may offer.
InvestingAn LLC is a good combination of protection with flexibility and tax benefits. It provides an array of taxation alternatives while shielding individual members from personal liability.
TradingTrading through a separate business structure allows active traders access to all of the tax mitigation and asset protection strategies available.