What is a potential disadvantage of a sole proprietorship?

• A. Limited liability
• B. Easy to attract investment
• C. All liability rests on the owner
• D. Access to expert partners

Answer: (C)

In a sole proprietorship, one of the significant potential disadvantages is that all liability rests on the owner. This means that the owner is personally responsible for all debts and obligations of the business. If the business incurs debt or faces legal actions, the owner's personal assets, such as savings or property, can be at risk. This characteristic distinguishes sole proprietorships from other business structures, such as corporations, where liability is limited to the extent of the business assets, protecting the owner’s personal assets from business liabilities.

Understanding this aspect is crucial for anyone considering starting a sole proprietorship, as it highlights the financial risk involved. Business owners should assess their risk tolerance and consider how they would manage potential liabilities before deciding on this structure. Recognizing the implications of bearing full liability helps inform decisions about whether other business structures might better suit their needs.