Entrepreneurship and Small Business (ESB) Certification Practice Exam

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Which business structure provides the least personal liability protection to the owner?

  1. Partnership

  2. Sole proprietorship

  3. Corporation

  4. Limited liability company

The correct answer is: Sole proprietorship

A sole proprietorship is the business structure that offers the least personal liability protection to the owner. In this type of business, the owner and the business are legally considered the same entity. This means that if the business incurs debts or is sued, the owner is personally responsible for those liabilities. Personal assets, such as savings accounts, real estate, and personal property, can be targeted to satisfy business debts or legal judgments. In contrast, a corporation and a limited liability company (LLC) provide personal liability protection to their owners. In these structures, the owners (shareholders in a corporation and members in an LLC) are typically not personally liable for the debts or legal obligations of the business. Partnerships may also expose owners to some liability, particularly in a general partnership, where partners can be held responsible for the actions of each other and the partnership’s debts. However, they still generally offer a higher degree of protection than a sole proprietorship. Thus, when considering the levels of personal liability protection, a sole proprietorship stands out as the structure that leaves the owner most vulnerable to personal risk related to the business's financial and legal obligations.