Entrepreneurship and Small Business (ESB) Certification Practice Exam

What is the most suitable business structure for a single owner seeking low risk?

1. S corporation

2. Partnership

3. LLC (limited liability company)

4. Corporation

The correct answer is: LLC (limited liability company)

The most suitable business structure for a single owner seeking low risk is the LLC (limited liability company). An LLC provides personal liability protection, meaning that as the owner, your personal assets are generally protected from business debts and claims. This characteristic makes it an attractive option for individuals who want to minimize their financial risk while still maintaining flexibility in management and taxation. One of the main benefits of an LLC is that it allows for pass-through taxation, where business profits and losses can be reported on the owner’s personal tax return, thereby avoiding double taxation which is commonly associated with corporations. This structure also allows for a simpler administrative framework and fewer regulatory requirements than corporations. While an S corporation also offers liability protection and pass-through taxation, it involves more formalities and restrictions than an LLC, such as limits on the number of shareholders and who can own shares. A partnership does not provide any liability protection, exposing the owner's personal assets to business liabilities. A corporation, while providing limited liability, often requires extensive record-keeping, ongoing formalities, and double taxation of profits. Thus, for a single owner looking for a low-risk business structure, the LLC is the most advantageous option, combining liability protection with operational flexibility and tax benefits.