Quick Answer
The exam groups individual, natural person, and sole proprietorship together, but only one is a business structure. A natural person is a living human; an individual is that person acting as a client. A sole proprietorship is a business with no legal separation from its owner, so the owner carries unlimited personal liability.
Mixing these terms up costs points on questions that test liability protection specifically. Treat "natural person" and "individual" as describing who the client is, and "sole proprietorship" as describing a business structure that person may also own.
What Do "Natural Person" and "Individual" Mean?
- 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
What Should an Adviser Weigh for Individual Suitability?
- Life stage, time horizon, income stability, family obligations
- Risk tolerance varies widely and must be assessed per client
- Tax bracket affects product recommendations (for example, municipal bonds for high-bracket clients)
- Liquidity needs may restrict access to certain investments, such as limited partnerships or 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 its owner has unlimited liability. If a question asks about liability protection, sole proprietorships provide NONE.
What Is a 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 is 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: the 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.
What Should You Check on Exam Day?
- Read "natural person," "individual," and "sole proprietorship" carefully. The first two describe who the client is; only the third is a business structure.
- If a question mentions liability protection or business debts, sole proprietorships offer none.
- If a question mentions personal-return tax reporting for a one-owner business, that points to Schedule C and a sole proprietorship.