Understanding Sole Proprietorships

What is a Sole Proprietorship?

A sole proprietorship is a business owned and operated by one person. The owner is personally responsible for all debts and liabilities of the business and reports the income on their personal tax return.

Which of the following statements is true about sole proprietorships?

Option 1: The owner of the sole proprietorship must report to shareholders.

Option 2: Sole proprietorships have limited liability.

Option 3: Sole proprietorships are taxed as corporations.

Option 4: Sole proprietorships are required to have a board of directors.

Final answer:

A sole proprietorship is a business owned and operated by one person. The owner is personally responsible for all debts and liabilities of the business and reports the income on their personal tax return.

Explanation:

A sole proprietorship is a business owned and operated by one person. The owner of a sole proprietorship is not required to report to shareholders (Option 1) since there are no shareholders in this type of business. Sole proprietorships do not have limited liability (Option 2), meaning that the owner is personally responsible for all debts and liabilities of the business. Sole proprietorships are not taxed as corporations (Option 3) but rather, the income from the business is reported on the owner's personal tax return. Lastly, sole proprietorships are not required to have a board of directors (Option 4) as the owner makes all the decisions and is solely responsible for the business.