Entrepreneurship and Small Business (ESB) Certification Practice Exam

What type of business structure is easy to create but comes with unlimited liability?

1. Partnership

2. Sole proprietorship

3. Corporation

4. LLC

The correct answer is: Sole proprietorship

A sole proprietorship is indeed the correct answer because it is the simplest and most common form of business ownership, requiring minimal legal formalities to establish. An individual can start this type of business without the need for extensive paperwork, making it particularly appealing for entrepreneurs looking to test their business ideas quickly and efficiently. One of the defining characteristics of a sole proprietorship is that the owner bears unlimited liability. This means that there is no legal distinction between the owner and the business, so any debts or legal obligations incurred by the business become the personal responsibility of the owner. If the business faces financial difficulties or legal claims, the owner's personal assets, such as their home or savings, could be at risk. In contrast, partnerships and corporations operate under different legal frameworks that provide varying levels of liability protection. Partnerships can also involve unlimited liability depending on the type of partnership, but certain partnership structures, like limited partnerships, can mitigate this risk. Corporations and LLCs (limited liability companies), on the other hand, are designed to protect owners from personal liability beyond their investment in the business. This makes them more complex to set up and manage, but they offer shields against the personal financial consequences of business failure or litigation.