Client Types

The whole unit on one sheet: individuals, business entities, trusts and estates, and foundations and charities, with the liability and tax distinctions the exam loves.

Which One-Liners Win Points?

• Only the C-corporation is automatically double-taxed; every other entity here is pass-through by default (though an LLC may elect C-corporation taxation).
• Executor manages the estate if named in a will; a court-appointed manager is a personal representative.

Which Numbers Matter Most?

What Liability Does a Sole Proprietor Carry?

• A natural person is a human being, as opposed to an artificial legal entity like a corporation or trust.
• A sole proprietorship has no legal separation, unlimited personal liability, and reports income on Schedule C of the personal return (Form 1040).
• A sole proprietorship ceases to exist at the owner's death. An individual account, by contrast, generally passes through probate. That contrast is the tested point.
• Pass-through taxation avoids double taxation; the owner also pays self-employment tax on net business income.

How Do the Business Entities Compare?

• Know who may act on each account: any partner can generally act for a general partnership; only the general partner may act for an LP; for an LLC or corporation, authority follows the members or managers named in the governing documents.
• LLC (Limited Liability Company): limited liability for members, flexible management, and flexible taxation (may elect partnership, S-corporation, or C-corporation treatment).
• C-corporation: limited liability, double taxation, multiple stock classes, unlimited life, freely transferable ownership.
• S-corporation: limited liability with pass-through taxation; capped at 100 shareholders, generally individuals who are U.S. citizens or resident aliens (certain trusts and estates may also qualify; no partnerships or corporations), one class of stock, though voting vs. nonvoting shares are permitted.

How Do Trusts and Estates Differ?

• Three parties: the grantor (also settlor or trustor) creates and funds it, the trustee manages it under a fiduciary duty, and the beneficiary receives the benefits.
• Revocable (living) trust: grantor can modify or dissolve, assets stay in the taxable estate, income reported on the grantor's Form 1040, avoids probate, no creditor protection.
• Trust tax brackets are compressed, hitting the top rate at low income, so distributing income to lower-bracket beneficiaries is a planning strategy.
• A testamentary trust is created by a will and takes effect after death (goes through probate); an inter vivos trust is created during life and can be revocable or irrevocable.
• An estate is temporary: it holds assets only until debts, taxes, and distributions are complete. Must file Form 1041 if it has $600 or more of gross income during administration, and Form 706 if the gross estate plus adjusted taxable gifts exceeds the exemption (or to elect portability even if not otherwise required). Strategy favors capital preservation and liquidity, not growth.

Which Rules Are Extra for Private Foundations?

• A private foundation typically has a single major funding source, must distribute at least 5% of non-charitable-use assets annually, and cannot make investments that jeopardize its charitable purpose.
• Missing the 5% minimum triggers a 30% excise tax on the undistributed amount; net investment income carries a 1.39% excise tax.
• Charitable organizations aim to preserve purchasing power against inflation, generate income, and meet spending needs while maintaining the endowment.

Which Gotchas Trip Students Up?

• The S-corporation one class of stock rule bars economic differences, not voting differences: voting vs. nonvoting shares are fine because they share identical distribution and liquidation rights.

One-Breath Recap

Two dividers organize this unit: liability (limited vs. unlimited) and taxation (pass-through vs. double). Sole proprietorships carry unlimited liability with pass-through Schedule C taxation, general and limited partnerships and S-corporations stay pass-through, and only the C-corporation is automatically double-taxed. A limited partner risks losing liability protection by managing, while a limited liability company (LLC) member never does and the LLC may itself elect C-corporation taxation. Trusts hinge on revocable (grantor keeps control, assets stay in the estate, no creditor shield) versus irrevocable (control surrendered, assets generally leave the estate, may gain creditor protection, files its own Form 1041), while estates are temporary preservation accounts. Private foundations must additionally distribute at least 5% of non-charitable-use assets annually, while both foundations and charities generally follow the Uniform Prudent Management of Institutional Funds Act.

Need more than the recap? Read the full Client Types unit.