What is a potential disadvantage of a sole proprietorship?

A sole proprietorship is a form of business ownership that is simple and easy to establish, but it comes with significant risks. One of the defining characteristics of a sole proprietorship is that the owner has unlimited personal liability for all business debts and obligations. This means that if the business incurs debts or faces lawsuits, the owner's personal assets—such as savings, property, and investments—can be used to settle these debts. This level of risk is a considerable disadvantage, as it exposes the owner to potentially devastating financial consequences.

In comparison, other business structures, like corporations or limited liability companies (LLCs), generally protect the owners' personal assets from being used to satisfy business liabilities. This distinction highlights the importance of understanding the implications of different business ownership types when making a choice. While sole proprietorships may offer ease and direct control, the exposure to unlimited personal liability is a critical factor for anyone considering this form of business.