Certified Apartment Portfolio Supervisor (CAPS) Practice Exam - Module 2

What is the primary risk associated with a sole proprietorship?

1. Difficulty in raising capital

2. Owner is personally liable for debts

3. Tax filing complexities

4. Limited profit potential

The correct answer is: Owner is personally liable for debts

The primary risk associated with a sole proprietorship is that the owner is personally liable for debts. In this structure, there is no legal distinction between the owner and the business. This means that if the business incurs debts or faces lawsuits, the owner's personal assets — such as their home, savings, and other personal property — can be targeted to satisfy those obligations. This level of personal liability is a significant risk and can lead to potentially devastating financial consequences for the owner if the business does not succeed or faces significant legal challenges. The other options relate to challenges that may be encountered in a sole proprietorship, but they do not highlight the risk of personal liability to the same extent. Difficulty in raising capital is indeed a characteristic of sole proprietorships due to the limited avenues for financing compared to corporations. Tax filing complexities can vary widely based on business activities, but generally, sole proprietorships enjoy simpler tax structures. Limited profit potential is also a consideration, often linked to the capacity for growth and scaling, but it does not present the immediate and dire financial risk that personal liability does.