ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -Sole proprietorships do not have the protection of limited liability. Instead, the sole owner has unlimited liability. This means that the sole owner is personally liable for the debts and expenses of the business. If the business is sued, the sole owner risks losing their personal assets.

Detailed explanation-2: -An example of unlimited liability is where a sole owner is responsible for a business, making themselves and the business entity one and the same thing. If the company encounters cash flow problems and cannot pay its debts, creditors can use the owner’s personal assets to pay the company debts.

Detailed explanation-3: -Sole proprietors have unlimited personal liability. There is no legal distinction between the owner and the business. This means that creditors of the business and individuals who have other claims against the owner can reach both the owner’s business and personal assets.