What type of business organization is owned by a single person, has limited life and unlimited liability? Corporation Partnership Sole proprietorship Limited liability company
The Correct answer and Explanation is:
The correct answer is Sole Proprietorship.
A sole proprietorship is a type of business organization owned and operated by a single individual. This structure is the simplest form of business entity and is particularly common among small businesses. One of the defining characteristics of a sole proprietorship is that the owner has unlimited liability. This means that there is no legal distinction between the owner and the business; thus, the owner’s personal assets are at risk if the business incurs debts or legal obligations. For instance, if the sole proprietorship faces a lawsuit or cannot pay its debts, creditors can pursue the owner’s personal assets, such as their home or savings, to satisfy business debts.
Additionally, a sole proprietorship has a limited life span. The existence of this type of business is inherently tied to the owner; it typically ceases to exist upon the owner’s death, retirement, or decision to close the business. This contrasts with corporations, which can continue to exist independently of their owners.
Sole proprietorships are also characterized by their ease of formation and minimal regulatory requirements. They do not require formal registration with the state (beyond obtaining necessary licenses or permits), and the owner retains complete control over business decisions. This structure allows for straightforward taxation, as the business income is reported on the owner’s personal tax return, avoiding the double taxation that can occur in corporations.
However, while sole proprietorships offer ease of management and tax benefits, the significant disadvantage is the risk of unlimited liability and the potential difficulty in raising capital, as investors may be less inclined to invest in a business without limited liability protections. Overall, sole proprietorships are an excellent choice for individual entrepreneurs looking to start a small business with minimal complexity.