How to Identify Primary Disadvantages of Operating as a Sole Proprietorship
What is the primary disadvantage of operating as a sole proprietorship?
A. A sole proprietorship may only be run as a non-profit organization.
B. Sole proprietorships are taxed at a higher rate than corporations.
C. Forming a sole proprietorship requires extensive paperwork to be completed by a lawyer and filed with the appropriate state office.
D. The owner of a sole proprietorship is personally liable for all business debts.
Answer:
The primary disadvantage of operating as a sole proprietorship is that the owner is personally liable for all business debts.
Explanation:
The primary disadvantage of operating as a sole proprietorship is that the owner of a sole proprietorship is personally liable for all business debts. In contrast, corporations as separate legal entities limit the personal liability of individuals associated with them for the business's debts and losses.
In a sole proprietorship, the business and the individual are essentially the same entity, meaning if the business incurs a debt, the owner is personally responsible for paying it. Corporations, partnerships, and public companies, however, offer more liability protection for their owners and shareholders.