What is the main disadvantage of operating as a sole proprietorship for a construction business?
Correct Answer
B) Unlimited personal liability for business debts
The main disadvantage of sole proprietorship is unlimited personal liability, meaning the owner's personal assets can be seized to satisfy business debts and legal judgments. This is particularly risky in construction due to high liability exposure.
Why This Is the Correct Answer
Unlimited personal liability is indeed the primary disadvantage of sole proprietorship because there is no legal separation between the business and the owner. In construction, this creates significant risk exposure since contractors face potential lawsuits for property damage, injuries, defective work, and substantial project costs. If the business cannot pay debts or legal judgments, creditors can pursue the owner's personal assets including their home, savings, and other property.
Why the Other Options Are Wrong
Option A: Required board of directors
Sole proprietorships actually have simple tax filing requirements, not complex ones. Business income and expenses are reported directly on the owner's personal tax return using Schedule C, making it one of the simplest business structures for tax purposes.
Option C: Complex tax filing requirements
Sole proprietorships can hire employees. While the owner cannot be an employee of their own business, they can hire workers and must comply with employment laws, payroll taxes, and workers' compensation requirements just like other business entities.
Memory Technique
Think 'SOLE = SOUL' - your whole soul (all personal assets) is at risk in a sole proprietorship
Reference Hint
Business and Finance chapter covering business entity types and liability structures
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