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TYPES OF ADVISORY CLIENTS

When an adviser meets with a potential new client, the adviser must determine the legal structure under which the client operates. Clients may hold investments in their own name or in any of the following entities:

• A sole proprietorship

• A C corporation

• An S corporation

• A partnership

• A limited partnership

• A family limited partnership . A trust

Corporations: A corporation is its own legal entity and has a perpetual life independent from its owners. How the corporation is taxed depends upon how the corporation is organized. C corporations are taxed at the corporate rate independent from the owners' tax rates. An S corporation allows the income to flow through to the owners and to be taxed as ordinary income. No more than 75 people can own an S corporation, and the S corporation must be organized as a domestic corporation.

Partnerships: A partnership is an association of two or more people who are either in business together or who hold assets in a partnership. The partnership agreement will detail each partner's ownership interest and authority to act on behalf of the partnership.

Limited partnership: A limited partnership consists of at least one general partner and one or more limited partners. It is the duty of the general partner to manage the partnership in accordance with the partnership's objectives. The limited partners put up the investment capital required but may not exercise management or control over the partnership.

Family limited partnership: A family limited partnership is often used for estate planning. Parents may place significant assets into a family limited partnership as a way to transfer their ownership. Usually the parents will act as the general partners and will transfer limited partnership interests to their children. As the interests are transferred to the children the parents may become subject to gift taxes. However, the gift taxes will usually be lower than they would have suffered without the partnership.

 
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