Unlimited Liability
On the whole, it’s general partnerships and sole proprietors that have unlimited liability for business debts. In general partnerships, partners share responsibility for debts. Sole proprietors are personally liable for all business debts.
Why is unlimited liability a disadvantage? With unlimited liability, owners’ personal assets may be seized to pay business debts. This level of financial risk is seen as a major drawback by most entrepreneurs.
What is an example of unlimited liability in a business? If a sole proprietor’s construction business gets into financial trouble and is unable to pay its debts, creditors can use the entrepreneur’s assets to pay the company’s debts because they and their company are legally the same.
Limited Liability
In contrast, corporations and limited liability companies (LLCs) limit owners’ personal liability. With an LLC, only the owner’s investment in the company is at risk. Forming a corporation or LLC limits owners’ liability. These business structures legally separate the company from its owners. As a result, owners’ personal assets are generally protected from claims against the business.
Advantages of a Sole Proprietorship
What are the advantages of a sole proprietorship? A sole proprietorship is easy and inexpensive to form. The owner retains complete control and retains all profits. However, the owner has unlimited liability for debts and obligations.