Test Question 1: When organizing a business there are various points to consider when dealing with the liability and tax consequences. Sole proprietorships are businesses owned and operated by one individual. If a person sets up a business as a sole proprietorship it is considered an extension of yourself. Therefore, as a sole proprietor, the business assumes personal responsible for all liabilities and debts the business incurs. Sole proprietors are not required to file for a state or city license to do business and they will file a regular 1040 or 2106 return (highest tax rate). However, in the event they are sued (ex: purple-headed lady crossing the street and their delivery guy hits her in a company van) they can lose everything because liability is high and they will be personally responsible for damages. A general partnership is much like a marriage arrangement; two or more people form a company and the owners are "jointly and severally" liable for debts and any legal actions the company may face individually. Limited partners are liable only to the extent of their original investment and the general partner will assume the majority of risk. Therefore, as a general or limited partner, the business assumes personal responsible for all liabilities and debts the business incurs. They will file a regular 1040 or 2106 return (highest tax rate). In the event they are sued (ex: purple-headed lady crossing the street and their delivery guy hits her in a company van) the business can lose everything because liability is high and they will be jointly responsible for damages. The third type of business in a corporation, which are owned by its shareholders. Because the corporation is a separate entity from its owners, shareholders have no legal liability for its debts. ...