What is the major downside of a sole proprietorship?

What is the major downside of a sole proprietorship?

• A. Lack of business risk
• B. Unlimited personal liability
• C. Limited liability
• D. Easy transfer of ownership

Answer: (B)

With a sole proprietorship, the owner and the business are one and the same, so there is no liability protection. The owner has unlimited personal liability for all debts and legal judgments of the business. If the business can’t pay what it owes or gets sued, the owner’s personal assets—savings, a home, a car—can be used to satisfy those obligations. This exposure is the major drawback of this structure because it puts the owner’s personal finances at risk regardless of how well the business operates. It also makes it tougher to raise large amounts of capital, since lenders often require collateral or personal guarantees. The other ideas don’t fit because the risks and protections described don’t align with a sole proprietorship: there is real risk, liability is not limited, and ownership transfer, while possible, isn’t typically the primary concern in this setup.

With a sole proprietorship, the owner and the business are one and the same, so there is no liability protection. The owner has unlimited personal liability for all debts and legal judgments of the business. If the business can’t pay what it owes or gets sued, the owner’s personal assets—savings, a home, a car—can be used to satisfy those obligations. This exposure is the major drawback of this structure because it puts the owner’s personal finances at risk regardless of how well the business operates. It also makes it tougher to raise large amounts of capital, since lenders often require collateral or personal guarantees. The other ideas don’t fit because the risks and protections described don’t align with a sole proprietorship: there is real risk, liability is not limited, and ownership transfer, while possible, isn’t typically the primary concern in this setup.