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Business ownership structures

Part 1 of 4

Sole Proprietorship

The simplest structure — one person owns and operates the business with no legal separation between owner and entity. Start-up costs are minimal and all decisions belong to the owner, but there is a major downside.

Set-up: cheap and fast; usually just a local registration.
Taxation: pass-through — business income is reported once on the owner's personal tax return.
Liability: unlimited. Creditors can pursue the owner's personal assets (home, savings, car) to satisfy business debts. This is the critical exam point.

Worked example

1Maria registers a food stall as a sole proprietor.
2The stall owes €8,000 to a supplier.
3If the stall cannot pay, the supplier can sue Maria personally and claim the full amount from her personal bank account — there is no legal wall between her and the business.

For the exam

Liability: Unlimited personal liability (personal assets at risk for business debts)
Taxation: Pass-through (owner pays personal income tax on all net profits)
Setup & Capital: Instant setup, zero formal capital required, limited to single owner's resources

1.A sole proprietor's personal savings are protected if the business cannot pay its debts.

2.A sole proprietorship's profits are taxed twice: once at the business level and once at the owner's personal level.

3.A sole proprietorship is typically the easiest and cheapest ownership structure to set up.

Study assistant

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Why is this the correct answer?

Eliminate any option that contradicts something stated directly in the lesson, then check which one actually follows from the rule you just learned. Tell me which option confused you and I'll point to the exact line.

Exam strategy

Accounting identities (Assets = Liabilities + Equity) must hold in every scenario. Sanity-check ratio questions with round numbers.

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