Quick Answer
Clients split into individuals (natural persons) and entities. Sole proprietorships and general partnerships give pass-through tax but unlimited liability. Limited liability companies (LLCs) and S corporations give both liability protection and pass-through; C corporations give protection but double taxation. Trusts, estates, foundations, and charities each carry their own fiduciary and tax rules.
The whole unit on one sheet: individuals, business entities, trusts and estates, and the institutional clients the exam loves to contrast.
Which One-Liners Win Points?
- A natural person is a living human; an individual is a natural person acting as a client. Neither is a sole proprietorship, which is a business structure with no liability protection.
- Sole proprietorship: no legal separation from the owner, income on the owner's personal return, unlimited liability, no continuity of life.
- General partnership: all partners have unlimited liability; income passes through; fiduciary duty runs between general partners.
- Limited partnership: general partner (GP) manages with unlimited liability; limited partner (LP) has limited liability but no management role. An LP who manages risks losing that protection.
- Limited liability company (LLC): hybrid giving limited liability to all members plus pass-through tax; members may manage without losing protection; can elect corporate taxation.
- C corporation: limited liability, double taxation, unlimited shareholders of any type, perpetual existence, multiple stock classes.
- S corporation: limited liability plus pass-through, but restricted (see numbers). Corporations and partnerships generally cannot be shareholders, though certain tax-exempt organizations such as qualified retirement plans and charities may hold shares.
- Trust: a grantor moves assets to a trustee for beneficiaries; the trustee owes fiduciary duty under the Uniform Prudent Investor Act (UPIA).
- Revocable (living) trust avoids probate but stays in the taxable estate; becomes irrevocable at death. Irrevocable trust generally removes assets from the estate and files its own return.
- Testamentary trust is created by a will, goes through probate, and is always irrevocable once the grantor dies.
- Charitable remainder trust (CRT): income to individual, remainder to charity. Charitable lead trust (CLT): income to charity, remainder to heirs (mirror images).
- Estate: temporary entity run by an executor (named in will) or administrator (court-appointed); adviser works with the executor, not the beneficiaries; objectives are capital preservation and liquidity.
- Private foundation: single funding source, mandatory annual distribution, excise tax on investment income. Public charity: public funding, no distribution rule, better donor deduction limits. Donor-advised fund (DAF): donor recommends grants only, cannot compel them.
Which Numbers Matter Most?
| Item | Value |
|---|---|
| S corporation shareholder cap | 100 (U.S. individuals, certain trusts/estates, and qualifying tax-exempt organizations); a family counts as one shareholder |
| S corporation stock classes | one only, though voting-rights differences among common shares do not create a second class |
| CRT remainder to charity | at least 10% of initial fair market value |
| CRT maximum term of years | 20 years |
| Private foundation annual distribution | at least 5% of the fair market value of its non-charitable-use assets |
| Private foundation excise tax | 1.39% of net investment income |
| Donor deduction limit, cash (private foundation) | 30% of adjusted gross income (AGI) |
| Donor deduction limit, cash (public charity / DAF) | 60% of AGI |
Which Gotchas Trip Students Up?
- Double taxation is C corporation only. Every other entity here defaults to pass-through, though an LLC can elect S- or C-corp treatment instead.
- The 100-shareholder cap is S corporation only; among the multi-owner entities in this unit, no other type caps owners, and S corporations bar foreign shareholders. A family counts as one shareholder toward the cap, so family ownership can exceed 100 individuals.
- Entities giving BOTH liability protection AND pass-through: LLC and S corporation. General partnerships pass through but have no protection; C corporations protect but double-tax.
- Removing assets from the estate is not the same as no tax. An irrevocable trust that retains income pays a higher effective rate because its brackets are compressed.
- The 5% distribution and the excise tax apply to private foundations only, not public charities or DAFs.
- A DAF donor recommends, never compels, a grant.
One-Breath Recap
A sole proprietorship has no liability shield and general partnerships leave partners fully liable, while limited liability companies and S corporations give both protection and pass-through taxation, and C corporations trade double taxation for protection and perpetual life. S corporations cap holders at 100 U.S. owners, counting a family as one, with a single stock class that may still carry different voting rights. Trusts run on grantor, trustee, and beneficiary: revocable avoids probate but stays in the taxable estate, irrevocable may reduce it depending on retained powers and applicable law, testamentary is born from a will, and charitable remainder and lead trusts are mirror images. Private foundations must distribute 5% of non-charitable-use assets and pay an excise tax; public charities and donor advised funds do not, and a fund donor only recommends.
Need more than the recap? Read the full Client Types unit.