Individuals and Sole Proprietorships

The exam groups these together: individual, natural person(s), sole proprietorship. Understanding the distinctions between them is important for selecting the right answer.

Individual / Natural Person

• Natural person = a living human being (as opposed to a legal entity like a corporation or trust)
• Individual = a natural person acting in their own capacity as a client

Investment suitability considerations for individuals:

• Life stage, time horizon, income stability, family obligations
• Risk tolerance varies widely; must be assessed per client
• Tax bracket affects product recommendations (e.g., municipal bonds for high-bracket clients)
• Liquidity needs may restrict access to certain investments (e.g., limited partnerships, annuities)

Exam Tip: Gotchas

• A "natural person" and an "individual" are NOT the same as a "sole proprietorship." A sole proprietorship is a business structure, and the owner has unlimited liability. If a question asks about liability protection, sole proprietorships provide NONE.

Sole Proprietorship

A sole proprietorship is a business owned and operated by one natural person with no legal separation between the owner and the business.

• Simplest and cheapest business structure to form
• Business income reported on the owner's personal tax return (Schedule C)
• Owner has unlimited personal liability for all business debts and lawsuits
• No liability protection; creditors can pursue the owner's personal assets
• No continuity of life; business ends when the owner dies or ceases operations

Exam Tip: Gotchas

• A sole proprietorship has no legal separation from the owner. The owner IS the business.
• No continuity of life: if the owner dies, the business ceases to exist.