What is the main difference between a sole proprietorship and a corporation regarding liability?

In a sole proprietorship, the business and the owner are considered to be the same legal entity. This means that the owner has unlimited liability, which exposes their personal assets to risks if the business incurs debts or faces legal action. If the business fails or is sued, creditors can pursue the owner's personal assets to settle any liabilities.

In contrast, a corporation is treated as a separate legal entity from its owners (the shareholders). This separation provides a protective shield, known as limited liability, which safeguards the personal assets of the shareholders. In the event that the corporation faces debts or legal issues, shareholders are only liable for the amount they invested in the company, protecting their personal assets from being claimed by creditors of the corporation.

Thus, the distinction lies in the liability exposure: sole proprietors bear unlimited liability, while owners of a corporation benefit from limited liability, insulating their personal assets from the corporation’s liabilities.