What is a major disadvantage of a sole proprietorship?

A major disadvantage of a sole proprietorship is the concept of unlimited personal liability. In a sole proprietorship, the business and the owner are legally considered the same entity, which means that the owner's personal assets can be at risk to satisfy business debts and liabilities. If the business incurs debt or faces legal claims, creditors can pursue the owner's personal assets, such as their home or savings, to recover what is owed. This risk can be significant, making it a crucial consideration for anyone contemplating the structure of their business.

In contrast, other organizational structures, such as corporations or limited liability companies (LLCs), offer the benefit of limited liability protection, which separates personal assets from the business's liabilities. Consequently, this feature of sole proprietorships can deter individuals from choosing this business form, particularly when significant financial investment or exposure to risk is involved.