What could be a potential downside of a sole proprietorship?

A potential downside of a sole proprietorship is that the owner is personally liable for business debts. This means that there is no legal distinction between the owner and the business; the owner's personal assets could be at risk if the business incurs debt or faces legal issues. For instance, if the business takes out loans or faces a lawsuit, creditors can pursue the owner's personal assets, such as savings, property, or other valuables, to satisfy business obligations. This level of risk can deter some individuals from choosing a sole proprietorship as their business structure, as it places the full financial burden on the individual owner rather than limiting their liability to the business itself.

In contrast, other business structures, like corporations or limited liability companies, offer liability protection, separating personal and business assets. This distinction allows owners to protect their personal wealth if the business experiences financial difficulties, making recognizing the downside of full personal liability in sole proprietorships essential for anyone considering this type of business entity.