Define a sole proprietorship and name one key tax advantage and one key disadvantage.

• A. A business owned by one person; advantage: profits taxed once as personal income; disadvantage: unlimited liability.
• B. A business owned by two or more partners; advantage: profits taxed at corporate rates; disadvantage: double taxation.
• C. A corporate entity separate from its owners; advantage: limited liability; disadvantage: complexity and double taxation.
• D. A nonprofit entity designed for charitable activities; advantage: tax-exempt status; disadvantage: constraints on profits.

Answer: (A)

A sole proprietorship is a business owned by one person. The tax advantage is that profits are taxed only once as the owner’s personal income, since there’s no separate corporate tax. The key disadvantage is unlimited liability—the owner is personally responsible for all business debts and obligations, which can put personal assets at risk. The other descriptions refer to different business forms (where there are multiple owners, or a separate legal entity, or nonprofit rules), so they don’t fit the definition of a sole proprietorship.