char [ ( n ) ]
Fixed-length, non-Unicode character data with a length of n bytes. n must be a value from 1 through 8,000. The storage size is n bytes. The ISO synonym for char is character.

varchar [ ( n | max ) ]
Variable-length, non-Unicode character data. n can be a value from 1 through 8,000. max indicates that the maximum storage size is 2^31-1 bytes. The storage size is the actual length of data entered + 2 bytes. The data entered can be 0 characters in length. The ISO synonyms for varchar are char varying or character varying.

nchar [ ( n ) ]
Fixed-length Unicode character data of n characters. n must be a value from 1 through 4,000. The storage size is two times n bytes. The ISO synonyms for nchar are national char and national character.

nvarchar [ ( n | max ) ]
Variable-length Unicode character data. n can be a value from 1 through 4,000. max indicates that the maximum storage size is 2^31-1 bytes. The storage size, in bytes, is two times the number of characters entered + 2 bytes. The data entered can be 0 characters in length. The ISO synonyms for nvarchar are national char varying and national character varying.

Noel McKinney (6/5/2009)

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Respectfully disagree with the answer; I'd actually say varchar(1) is the worst choice. You've got the +2 byte overhead for allowing variable length when the question states the length will always be one, plus if you are going to waste space then use it on the possibility of needing to store Unicode characters. It seems there are two choices for "best" and that would be char(1) or nchar(1)... char(1) because it does the job with the least space unless you need Unicode, in which case nchar(1) is best.