Quick Answer
A natural person is a human client, and an individual account is the simplest account structure, generally passing through probate at death unless a beneficiary designation is on file. A sole proprietorship is an unincorporated one-owner business with no legal separation from its owner, unlimited personal liability, and pass-through taxation reported on Schedule C.
The most common clients you will encounter are natural persons, meaning individual human beings (as opposed to legal entities like corporations or trusts). This section covers the simplest client structures: individual accounts and sole proprietorships.
What Is a Natural Person, and How Does an Individual Account Work?
- A natural person is a human being, distinguished from artificial legal entities such as corporations, trusts, or partnerships
- Individual accounts are the simplest account structure: one person owns the account
- The account holder has full control over investment decisions and account activity
- At death, assets in a standard individual account pass through probate (the court-supervised process of distributing a deceased person's estate), unless the account carries a transfer-on-death (TOD) or payable-on-death (POD) beneficiary designation, which passes assets directly to the named beneficiary
Exam Tip: Gotchas
Individual account assets go through probate at death unless a TOD/POD beneficiary designation is on file. This is a key reason clients may prefer trusts or TOD/POD registration, both of which can avoid probate.
What Is a Sole Proprietorship?
A sole proprietorship is an unincorporated business owned and operated by one person. It is the simplest form of business entity.
Key characteristics:
- No legal separation between the owner and the business; the owner is the business
- Unlimited personal liability: The owner is personally responsible for all business debts and obligations. Creditors can pursue the owner's personal assets (home, car, savings) to satisfy business debts
- Tax treatment: Business income and losses are reported on the owner's personal tax return using Schedule C (Form 1040). There is no separate business tax return
- Pass-through taxation: Profits are taxed only once, at the individual level, avoiding double taxation
- The owner also pays self-employment tax (Social Security and Medicare) on net business income
| Feature | Individual Account | Sole Proprietorship |
|---|---|---|
| Owner | Natural person | Natural person (one owner) |
| Liability | N/A (personal account) | Unlimited personal liability |
| Taxation | Personal return (1040) | Schedule C on personal return (1040) |
| Legal separation | N/A | None; owner = business |
| At death | Assets generally go through probate (unless a TOD/POD designation is on file) | Business ceases to exist |
Exam Tip: Gotchas
A sole proprietorship is not a separate legal entity. If the owner is sued, personal assets are at risk. This unlimited liability is the primary disadvantage compared to LLCs and corporations.
What Should You Check on Exam Day?
- A natural person is a human being, distinguished from artificial legal entities like corporations, trusts, or partnerships.
- Individual account assets generally pass through probate at death unless a TOD/POD beneficiary designation is on file; a reason clients may prefer trusts or TOD/POD registration.
- A sole proprietorship has no legal separation between owner and business; the owner is the business.
- The owner carries unlimited personal liability for business debts; personal assets are at risk.
- Business income and losses are reported on Schedule C of the owner's personal Form 1040; there is no separate business return.
- Sole proprietorship taxation is pass-through (taxed once, at the individual level), and the owner also pays self-employment tax on net business income.
- A sole proprietorship ceases to exist at the owner's death, unlike an individual account, which generally passes through probate.