Canadian Securities Course (CSC) Level 1 Practice Exam

What are the main differences between a sole proprietorship and a partnership?

1. In sole props, only 1 person runs the business and is responsible for all the liabilities.

2. In a partnership, only 1 person runs the business and is responsible for all the liabilities.

3. In a partnership, there is no difference between the business's assets and the person's assets.

4. In a partnership, two or more people run the business.

The correct answer is: In sole props, only 1 person runs the business and is responsible for all the liabilities.

The correct answer identifies a key characteristic of a sole proprietorship: it is owned and operated by one individual who bears full responsibility for the business's liabilities. This means that the owner’s personal assets are potentially at risk if the business incurs debts or legal issues. In contrast, a partnership involves two or more individuals who share the responsibilities of running the business. This fundamental difference in ownership structure is important because it impacts liability and decision-making. In a partnership, liability can be shared among partners, though specific terms can vary based on the partnership agreement and whether it is a general partnership or a limited partnership. While the other choices do present aspects related to partnerships and sole proprietorships, they either misrepresent the nature of partnerships or blend characteristics from both business structures inaccurately. For example, partners typically share management and liability, which is not accurately conveyed in those options. Understanding these distinctions is critical for anyone studying business structures within the Canadian Securities context, as they affect various factors including taxation, personal liability, and operational control.