Michael, operates his business as a sole proprietorship. In 2008, his business was caught up in the national economic downturn. His business suffers severe financial difficulties, resulting in a debt of $1.5 million, due to a loss of market share and default on loans. Michael's personal net worth (unrelated to his business) is $1 million and he has $50,000 invested in his business.
What does Michael stand to lose? In other words, what is the limit of his liability?
Because he was running his business as a sole proprietorship, every asset he has is at risk. This means Michael could lost his entire personal net worth of $1 million and well as the $50,000 he has invested in his business.
If Michael has operated his business as a corporation or as an LLC, he would have limited his liability for business losses to only his business assets. Although he could lose the $50,000 he has in his business, his personal assets of $1 million would be beyond the reach of business creditors provided he had not personally guaranteed any of the loans.