What does the term "unlimited liability" mean for sole traders?

The term "unlimited liability" in the context of sole traders means that the owner is personally liable for all business debts. This legal structure indicates there is no separation between the individual and the business; consequently, if the business incurs debt or faces legal action, the owner's personal assets, such as savings, real estate, and other properties, can be used to settle those debts. This concept emphasizes that the financial risk associated with running the business falls entirely on the owner.

Other options suggest limitations on liability or the owner's ability to manage business risk that do not apply to sole traders. For instance, indicating that the owner is only liable for debts up to their investment or has limited responsibility misrepresents the nature of a sole trader's legal obligations. Thus, understanding the nuances of unlimited liability is crucial for anyone considering starting a business as a sole trader, as it impacts financial security directly.