What does it mean to have unlimited liability as a sole trader?

Having unlimited liability as a sole trader means that the owner is personally responsible for all the debts incurred by the business. This means that there is no legal distinction between the owner’s personal assets and the business assets. If the business cannot meet its financial obligations, creditors can pursue the owner's personal belongings—such as their home, savings, and other assets—to satisfy business debts. This reflects a high level of risk for the sole trader, as their personal financial security is at stake.

Other choices do not accurately describe this situation: the idea that the owner’s personal assets are protected contradicts the concept of unlimited liability; stating that the business can only operate locally does not relate to liability; and mentioning that the owner has a fixed income ignores the variability of income depending on business success. Thus, the notion of unlimited liability inherently indicates the potential for personal financial loss beyond the business's assets.