Sole Trader Characteristics Steps:

• Identify key features of a sole trader: single owner, unlimited liability, no separate legal entity from owner.
• Evaluate statement 1: Correct, as sole traders report business income on personal tax returns.
• Evaluate statement 2: Correct, as sole traders have unlimited personal liability for business debts.
• Evaluate statement 3: Incorrect, as sole traders do not have limited liability protection.

Why D is correct:

• Sole traders lack limited liability by legal definition, making statement 3 false while 1 and 2 align with business law.

Why the others are wrong:

• A assumes 1 and 2 are incorrect, but both are accurate traits of sole traders.
• B assumes only 1 is incorrect, but 1 is correct and 3 is the error.
• C assumes 2 and 3 are incorrect, but 2 is correct.

Final answer: D