In a sole proprietorship, how are business assets and liabilities treated?

In a sole proprietorship, business assets and liabilities are treated as combined with personal assets and liabilities. This means that there is no legal distinction between the owner’s personal finances and the business’s finances. The owner is personally liable for all business debts, which means that creditors can pursue the owner’s personal assets to satisfy business obligations.

This structure impacts the owner's financial risk, as they are fully responsible for any debts incurred by the business. This combination provides simplicity in management and taxes, but significantly increases the risk for the owner in terms of personal financial exposure. Understanding this characteristic is vital for anyone considering a sole proprietorship as they need to be aware of the implications it has on their personal financial situation.