Explain the difference between a sole proprietorship and a corporation for financing.

• A. Sole proprietorship has limited liability; corporation has unlimited liability.
• B. Sole proprietorship is a separate legal entity; corporation is owned by one person.
• C. Sole proprietorship is owned by one person with unlimited liability; corporation is separate legal entity with potential for easier financing and limited liability.
• D. Both have identical financing options.

Answer: (C)

When thinking about financing, the big difference is liability protection and where money can come from. A sole proprietorship is owned by one person and carries unlimited liability, meaning the owner’s personal assets are at risk if the business can’t pay its debts. Because of that, lenders often view it as tightly tied to the owner and require personal guarantees or collateral, which can limit how much financing is available and under what terms. In contrast, a corporation is a separate legal entity. Owners (shareholders) typically have liability limited to their investment, which makes the business a more attractive unit for lenders and investors. This separation, plus the ability to raise funds by issuing stock or borrowing in the corporation’s name, generally makes financing easier and more flexible for a corporate structure. So the real contrast is personal liability and access to broader financing avenues: sole proprietorships rely on personal credit and guarantees, while corporations can tap into equity and debt markets with separate liability protection.