Multiple Choice
Which of the following can be considered disadvantages of sole proprietorships and partnerships?
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1. Introduction to Accounting
Business Organization
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Which of the following is a disadvantage of a sole proprietorship?
A
Complex formation procedures
B
Double taxation of profits
C
Unlimited personal liability
D
Shared decision-making authority
Verified step by step guidance1
Understand the concept of a sole proprietorship: A sole proprietorship is a business owned and operated by one individual. It is the simplest and most common form of business structure.
Review the characteristics of a sole proprietorship: Key features include ease of formation, full control by the owner, and direct taxation of profits (no double taxation). However, it also comes with certain disadvantages.
Identify the disadvantages of a sole proprietorship: The primary disadvantage is unlimited personal liability, meaning the owner is personally responsible for all debts and obligations of the business. This can put personal assets at risk.
Analyze the incorrect options: 'Complex formation procedures' is not applicable because sole proprietorships are easy to set up. 'Double taxation of profits' applies to corporations, not sole proprietorships. 'Shared decision-making authority' is irrelevant because sole proprietorships are managed by a single individual.
Conclude that the correct answer is 'Unlimited personal liability,' as it is the most significant disadvantage of a sole proprietorship.
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