Compare business entity types - sole proprietorship, partnership, C corporation, S corporation, and LLC - and apply the check-the-box default classification and election rules.

Dalton Reeve is deciding how to structure a new retail venture he will own and run by himself, with no other owners. He is most concerned about shielding his personal assets, such as his home and savings, from claims arising out of the business, including ordinary commercial debts and accidents on the premises. He is comparing operating as a sole proprietorship with forming a single-member limited liability company that is disregarded for tax. Which statement best describes how these two choices differ on the point he cares about?

• AA single-member LLC generally shields the owner's personal assets from the entity's business liabilities under state law, even though it is disregarded for federal income tax, whereas a sole proprietor is personally liable for business debts.check_circle Correct
• BBoth choices give the same result, because a single-member LLC that is disregarded for tax is also disregarded for liability, so its owner is personally liable just like a sole proprietor.
• CA sole proprietorship gives better protection, because the owner's unlimited personal liability lets creditors reach the business assets first and leave personal assets untouched.
• DOnly an S corporation election can provide any liability protection, so neither a sole proprietorship nor a disregarded LLC offers any shield until Dalton files Form 2553.

Why A is correct: A single-member LLC is a separate legal entity that generally limits its owner's exposure to business liabilities under state law, and its disregarded federal tax status does not remove that protection, while a sole proprietor has unlimited personal liability.

Why B is wrong: It is tempting to assume tax treatment and liability move together, but disregarded status is only a federal tax concept; the LLC remains a separate legal entity under state law and can still limit the owner's personal liability.

Why C is wrong: This inverts the rule, because unlimited personal liability exposes the owner's personal assets to business claims rather than protecting them, so the sole proprietorship offers less protection, not more.

Why D is wrong: An S election is a tax status, not a liability shield, and limited liability flows from forming the LLC under state law rather than from any federal tax election, so Form 2553 is irrelevant to the protection question.