Which describes a sole proprietorship?

Which describes a sole proprietorship?

• A. Reports business income and losses on the owner's personal tax return and has unlimited liability
• B. Is a separate legal entity with limited liability
• C. Must file corporate taxes separately
• D. Is a partnership between two or more people

Answer: (A)

Sole proprietorship means one person owns and runs the business with no separate legal entity. Because there’s no separation between owner and business, the business income and losses pass through to the owner’s personal tax return, and the owner has unlimited liability—personal assets can be used to cover business debts. This combination—pass-through taxation on the owner’s return and unlimited personal liability—fits the description of a sole proprietorship. By contrast, a separate legal entity with limited liability would be a corporation or LLC, which files its own taxes and protects personal assets; corporate taxes are filed separately; and a partnership involves two or more people, not a single owner.

Sole proprietorship means one person owns and runs the business with no separate legal entity. Because there’s no separation between owner and business, the business income and losses pass through to the owner’s personal tax return, and the owner has unlimited liability—personal assets can be used to cover business debts. This combination—pass-through taxation on the owner’s return and unlimited personal liability—fits the description of a sole proprietorship. By contrast, a separate legal entity with limited liability would be a corporation or LLC, which files its own taxes and protects personal assets; corporate taxes are filed separately; and a partnership involves two or more people, not a single owner.