1. Individuals, Natural Persons, and Sole Proprietorships

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.

Natural Persons and Individual Accounts

• 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 an individual account pass through probate (the court-supervised process of distributing a deceased person's estate)

Exam Tip: Gotchas

Individual account assets go through probate at death. This is a key reason clients may prefer trusts, which can avoid probate entirely.

Sole Proprietorships

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

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.