"Sie" vs "sie"
It is my understanding that "sie" (lowercase) is used for the english "her" and "they", while "Sie" (uppercase) is used for the english "you" (formal and singular). In one of the lessons I was given a multiple choice question; in the correct answer of which a "sie" corresponded with a "you". To my thinking this would only be correct if the "sie" were capitalized. Is the distinction between lowercase and uppercase necessary or am I mistaken?
The distinction is necessary as you supposed. "sie" is she (nominative and accusative) and they (nom and acc) and capitalized is You - formal
You need to watch the verb form to be sure which it is if Sie is at the beginning of the sentence, and in such case always capitalizes
like: Sie trinkt - she drinks Sie trinken - they/You drink
hope this helps :)
You are exactly correct, there is a distinction. Germans also capitalize letters at the start of sentences though, so a sentence like "Sie essen Brot." can be ambiguous without other context.