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


Related Articles
  1. Professionals

    Client Type

    NASAA Series 65: Section 11 Client Type. This section contains descriptions about Sole Proprietorship, different types of Partnerships, Corporations and other entities.
  2. Professionals

    Suitability Factors

    FINRA Series 6: Section 9 Suitability Factors. In this section Financial Status of Clients, Client Type, Partnerships, Corporations, Current Status, Emergency Insurance, Current Investments, ...
  3. Professionals

    Forms Of Business Organization

    Find out how businesses are organized.
  4. Professionals

    Types Of Businesses

    This section includes exam topics regarding various types of business entities and their filing requirements.
  5. Entrepreneurship

    Starting A Small Business: Business Structures

    By Amy Fontinelle When you start your business, you have several options for structuring it that will affect your income tax situation and your potential liability if something goes wrong.Sole ...
  6. Entrepreneurship

    Which Type of Organization Is Best For Your Business?

    Learn the differences between the types of business organizations so you can determine how to best structure your business for tax and liability limitations.
  7. Options & Futures

    Asset Protection For The Business Owner

    Could incorporating your business help protect it? Find out here.
  8. Entrepreneurship

    S Corp. Vs. LLC: Which Should I Choose?

    Understand the major distinctions between an S corporation and an LLC, and the important factors to consider when choosing your business structure.
  9. Entrepreneurship

    Taxes in California for Small Business: The Basics

    Understand the tax implications of running a small business in California, and learn which state taxes apply based on business type.
  10. Entrepreneurship

    Taxes in New York for Small Business: The Basics

    Learn how small businesses are taxed in New York, and understand how tax rates vary based on whether the business is an S corporation, LLC or partnership.
RELATED TERMS
  1. Company

    An entity formed to engage in a business. A company may be organized ...
  2. C Corporation

    A legal structure that businesses can choose to organize themselves ...
  3. Partnership

    A business organization in which two or more individuals manage ...
  4. Firm

    A firm is a business organization, such as a corporation, limited ...
  5. Limited Liability Company - LLC

    A corporate structure whereby the members of the company cannot ...
  6. Subchapter S (S Corporation)

    A form of corporation that meets the IRS requirements to be taxed ...
RELATED FAQS
  1. If you have a house that is under your company name and you want to sell it back ...

    The answer to this question really depends on the type of legal entity your business is operated through. Businesses may ... Read Answer >>
  2. Do companies have to pay back their paid-up capital?

    Learn what business structures are available to entrepreneurs, and learn the process for making the most appropriate selection ... Read Answer >>
  3. What's the difference between a financial plan and a financial forecast?

    Learn which types of business structures present the greatest amount of risk through unlimited liability to the owner or ... Read Answer >>
  4. What's the difference between limited liability partnership and general partnership?

    Learn the differences between general partnerships and limited liability partnerships; each type has unique traits, benefits ... Read Answer >>
  5. What are some examples of how corporations manage short-term investments?

    Learn how a business owner can protect against significant liability by forming a corporate entity structure, and understand ... Read Answer >>
  6. What's the difference between general, limited and joined venture partnerships?

    Read about some of the important differences between general partnerships, limited partnerships and joint venture arrangements ... Read Answer >>
Hot Definitions
  1. Law Of Demand

    A microeconomic law that states that, all other factors being equal, as the price of a good or service increases, consumer ...
  2. Cost Of Debt

    The effective rate that a company pays on its current debt. This can be measured in either before- or after-tax returns; ...
  3. Yield Curve

    A line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but differing maturity ...
  4. Stop-Limit Order

    An order placed with a broker that combines the features of stop order with those of a limit order. A stop-limit order will ...
  5. Keynesian Economics

    An economic theory of total spending in the economy and its effects on output and inflation. Keynesian economics was developed ...
  6. Society for Worldwide Interbank Financial Telecommunications ...

    A member-owned cooperative that provides safe and secure financial transactions for its members. Established in 1973, the ...
Trading Center