What is the main disadvantage of a Sole Proprietorship?

• A. The owner is personally liable for the company's debts and losses
• B. The owner has corporate tax treatment
• C. The owner has a board and officers
• D. The owner has limited liability

Answer: (A)

The core issue is liability exposure. In a sole proprietorship there is no legal separation between the owner and the business, so the owner is personally responsible for all business debts and losses. That means personal assets—like a home, car, and savings—can be pursued to satisfy business obligations, making unlimited personal liability the main drawback of this structure.

Tax treatment here flows through to the owner's personal return, which is not itself a disadvantage, but it’s not a corporate tax treatment. Corporate governance like a board and officers isn’t part of this arrangement, and there isn’t limited liability protection—unlike corporations or LLCs, where the owner's personal assets are generally protected from business debts and lawsuits.