Multiple Choice
An S corporation has the liability protections of a corporation but is taxed:
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1. Introduction to Accounting
Types of Accounting
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What is the biggest disadvantage of the sole proprietorship form of business organization?
A
Unlimited personal liability for business debts
B
Double taxation of profits
C
Complex and costly formation process
D
Limited control over business decisions
Verified step by step guidance1
Understand the question: The problem is asking about the biggest disadvantage of a sole proprietorship form of business organization. Review the characteristics of a sole proprietorship to identify its disadvantages.
Recall the key features of a sole proprietorship: It is a business owned and operated by one individual. The owner has full control over business decisions, and the profits are taxed as personal income.
Analyze the options provided: Evaluate each option to determine if it aligns with the characteristics of a sole proprietorship.
Option 1: 'Unlimited personal liability for business debts' - This is a significant disadvantage of a sole proprietorship because the owner is personally responsible for all business debts and obligations.
Option 2: 'Double taxation of profits' - This does not apply to sole proprietorships, as profits are only taxed once as personal income. Option 3: 'Complex and costly formation process' - Sole proprietorships are simple and inexpensive to set up. Option 4: 'Limited control over business decisions' - This is incorrect because the owner has full control. Therefore, the correct answer is 'Unlimited personal liability for business debts.'
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