Series 66

AAA

Analyzing Your Client's Financial Profile - Client Type

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:

Partnerships

  • Business partnership- In this 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 - Here 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.).

Corporations
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 (less than 75 shareholders) that want the legal protection of a corporation but the flow-through taxation of partnerships (corporate losses are applied to personal income tax return).
  • Limited Liability Corporation - This type of structure provides a company's owners with protection from debts, but is taxed as if it is a sole proprietorship.

Look Out!
On the exam, you are likely to be given a description of a new business and be 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.)

Other Entities

  • Estates - An estate account is typically open only a short time, until the estate assets are distributed to beneficiaries, so 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:

  1. Which business entity would provide a flow-through of business income or losses as well as limited liability to the owners?
    1. Sole Proprietorship
    2. General Partnership
    3. C Corporation
    4. S Corporation

The correct answer is "d": only the S Corporation offers both of these advantages.

  1. Which investments would be considered suitable for an estate account?
    1. Treasury bonds
    2. Options
    3. Money market fund
    4. 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
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