Understanding Sole Proprietorship: A Detailed Analysis

What are the characteristics of a sole proprietorship?

1. A sole proprietorship joins two or more individuals as co-owners.

2. The sole proprietor is personally liable for the liabilities of the business.

3. A sole proprietorship is taxed separately from the owner.

4. A sole proprietorship has to pay business income taxes.

Answer:

The correct statement about a sole proprietorship is that the sole proprietor is personally liable for the liabilities of the business.

A sole proprietorship is a type of business owned and operated by a single individual. Unlike partnerships or corporations, a sole proprietorship does not involve multiple owners. This means that the sole proprietor has full control over the business decisions and operations.

One of the key characteristics of a sole proprietorship is that the sole proprietor is personally liable for the business's debts and obligations. This means that if the business incurs debts or faces legal action, the sole proprietor's personal assets may be at risk to cover these liabilities. This unlimited liability is a significant risk factor for sole proprietors.

Unlike a corporation, a sole proprietorship is not a separate legal entity from its owner. This means that the business income is treated as the owner's personal income and is taxed accordingly. The owner must report the business income on their personal tax return and pay taxes on it at the individual tax rates.

Additionally, a sole proprietorship is not required to pay business income taxes separately. The business income is considered part of the owner's income, and the owner is responsible for paying income taxes on the business profits.