Future Business Leaders of America (FBLA) Accounting Practice Test

What is a 'Proprietorship' in business terms?

1. A partnership between multiple owners

2. A type of corporation

3. A business owned by a single individual

4. A business owned by the government

The correct answer is: A business owned by a single individual

A proprietorship, in business terminology, refers to a business that is owned and operated by a single individual. This form of business structure is characterized by ease of establishment, where one person has complete control over decision-making and the direction of the business. In a proprietorship, the owner is personally responsible for all debts and obligations, meaning there is no legal distinction between the owner and the business entity. This structure is common for small businesses, freelancers, or sole traders, as it allows for simplicity in management and tax reporting. Understanding this definition is crucial because it highlights the personal liability aspect, which is a significant consideration for anyone thinking about starting a proprietorship. The advantages include fewer regulations, direct tax benefits where income is reported on the individual's personal tax return, and complete control over the profits. This setup often appeals to entrepreneurs who prefer to operate independently without the complexities that come with partnerships or corporations.