Final answer:
In a sole proprietorship, the owner has unlimited liability, facing personal responsibility for debts and obligations, which presents high personal risk in case of business failure. Conversely, it allows complete control and retention of profits but makes raising funds more challenging compared to other business structures like corporations and partnerships.
Step-by-step explanation:
The liability in a sole proprietorship is unlimited, which means the owner is personally responsible for all debts and obligations of the business. This is both an advantage and a disadvantage. The advantage of a sole proprietorship is the simplicity and control it offers, allowing for full ownership of profits and decision-making. However, the disadvantage is the personal risk involved; in the event of bankruptcy or a lawsuit, the owner could lose personal assets such as a home or savings.
Advantages and Disadvantages of Sole Proprietorship
- Full control and entitlement to profits
- Simplicity in management and operation
- Personal liability can lead to loss of personal assets
- More difficult to raise funds compared to corporations or partnerships
A sole proprietorship, while offering control and simplicity, carries significant personal risk, potentially impacting the owner's personal financial stability.
Comparison with Other Business Structures
- Limited Liability Partnerships (LLPs) protect personal assets of the owners.
- General Partnerships involve shared liability among partners.
- Corporations offer limited liability to shareholders, making it easier to raise funds and protect personal assets.