Wisconsin Esthetics State Board Practice Test

What describes a sole proprietorship?

1. Ownership by multiple individuals sharing profits

2. A corporation with many shareholders

3. A business owned and controlled entirely by one person

4. A partnership with a formal agreement

The correct answer is: A business owned and controlled entirely by one person

A sole proprietorship is defined as a business that is owned and controlled entirely by one individual. This structure is the simplest form of business organization, where the owner has complete authority over decision-making and is entitled to all profits generated by the business. The owner also bears all risks and liabilities associated with the business, meaning that their personal assets could be at risk if the business incurs debt or faces legal issues. In contrast, the other options describe different business structures. Ownership by multiple individuals sharing profits refers to a partnership or similar arrangements, where profits and responsibilities are divided among several owners. A corporation with many shareholders involves multiple individuals who invest in the business and share ownership through stock, providing limited liability to the shareholders. Lastly, a partnership with a formal agreement indicates a business arrangement where two or more individuals share ownership and responsibilities, typically defined by a legal contract. Each of these structures has its own implications for liability, taxation, and management, making the sole proprietorship distinct due to its singular ownership and control.