Before you recommend a single security, answer a quieter question: who, legally, is the client? The answer decides who may sign and who pays the tax. It also decides how long the money can stay invested and even whether you must register in the client's state.
Your duty of care is the same for every client, but the facts you gather are not. Legal form tells you four things: who may give instructions, how income is taxed, who is liable for debts and how long the money's horizon runs.
The Uniform Securities Act of 1956 (USA 1956), the state law this exam tests, defines person in Section 401(j). The list:
- An individual, a corporation, a partnership or an association.
- A joint-stock company or an unincorporated organization.
- A trust where the beneficiaries' interests are evidenced by a security.
- A government or a political subdivision.
An individual is the first kind of 'person' the Act names. Estates and ordinary family trusts are missing from that list. They appear only in the 2002 Act's broader definition.
Common mistakes
- Reversing joint ownership at death: JTWROS sends the share to the surviving owner outside probate. TIC sends it through the deceased owner's estate.
- Borrowing the 2002 Act's figure: On the tested 1956 Act, a benefit plan is institutional at $1,000,000, not $10,000,000. A $999,000 plan counts toward the five.
- Making every estate file: Only a gross estate above $15,000,000 (2026) requires the federal return. It's due 9 months after death, not April 15.
Bottom line
- USA 1956 Section 401(j) names an individual first among persons; estates and ordinary family trusts are not on its list.
- Sole proprietors and general partners carry unlimited personal liability, and general partners are jointly and severally liable for all partnership debts.
- Partnerships, LLCs by default and S corporations pass income through on Schedule K-1; a C corporation pays a flat 21% and shareholders pay again on dividends.
- An S corporation must be domestic, with no more than 100 shareholders (a family counts as one), one class of stock and only eligible owners.
Exam shortcut
When a stem names an entity, ask three questions in order: who signs, who pays tax and who is liable. Authority always comes from a document, such as the letters, the trust instrument, the agreement or the resolution. It never comes from a job title alone. For tax, sort the client into one of two groups.
The full lesson (about 4,351 words, 29 min read) adds 2 worked examples, all 6 common mistakes, a self-check, free in the app.
Learning objectives
- C19
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