Which statement describes a disadvantage of sole proprietorships?

• A. Owners are subject to unlimited personal liability
• B. The owner has a separate legal entity
• C. They can easily attract venture capital
• D. They outlive the owner

Answer: (A)

In a sole proprietorship there is no separation between the owner and the business, so liability is personal and unlimited. This means if the business owes money or is sued, the owner’s personal assets—like savings, home, or other property—can be at risk to satisfy those obligations. That exposure to personal financial risk is the most significant downside of this structure because it directly ties the owner’s wealth to the business’s fortunes.

For context, the idea that there’s a separate legal entity is not correct here; the business and owner are the same legal entity. The notion that they can easily attract venture capital ignores how investors typically fund and exit in more formal structures like corporations or LLCs. And the idea that they outlive the owner isn’t accurate because the business typically ends when the owner dies or stops operating, unless it’s reorganized into a different form.