Which statement accurately describes a sole proprietorship?

• A. A single-owner business with no separate legal entity; unlimited personal liability; simple tax treatment.
• B. A separate legal entity with limited liability.
• C. Owned by shareholders with corporate tax treatment.
• D. Tax-exempt entity not required to file returns.

Answer: (B)

A sole proprietorship is a single-owner business that isn’t a separate legal entity from the owner. Because there’s no legal separation, the owner has unlimited personal liability for all debts and obligations of the business. Tax-wise, it’s simple: business income is reported on the owner’s personal tax return, so profits and losses flow through to the owner's personal taxes.

The idea of a separate legal entity with limited liability describes forms like a corporation or an LLC, which shield owners from personal liability and treat the business as its own entity. Being owned by shareholders with corporate tax treatment aligns with a corporation, not a sole proprietorship. A tax-exempt entity not required to file returns refers to a nonprofit organization, which is a different structure entirely.