Future Business Leaders of America (FBLA) Agribusiness Practice Test

Which is a disadvantage of a sole proprietorship?

1. Simple to start and end

2. Profits are taxed at individual rates

3. Less government regulation

4. Unlimited liability for debts

The correct answer is: Unlimited liability for debts

A key characteristic of a sole proprietorship is that the owner is personally responsible for all debts and liabilities incurred by the business. This means that if the business fails or faces legal actions, the owner’s personal assets—such as their home, car, and savings—can be used to satisfy business debts. This concept is known as unlimited liability, and it is one of the major drawbacks of operating as a sole proprietorship. In contrast, while the other options highlight aspects that are generally considered advantages, they do not directly point to the significant risk that comes with unlimited liability. For example, sole proprietorships are indeed simple to start and involve less government regulation, making them attractive for many individuals. Taxes on profits at individual rates can also be seen as a benefit since it allows for a simpler tax structure. However, the risk associated with unlimited liability is a serious consideration that may deter potential entrepreneurs from choosing this business structure.