A:

The risks that a business owner faces under a business structure with unlimited liability are literally unlimited, but they normally fall under the following types of risks: financial, business, systematic and unsystematic. Since the business owner with unlimited liability is not protected against the risks that his business may face, he is exposed to and responsible for all forms of risk and their resulting effects.

Unlike a limited liability company, C corporation or S corporation, where the business owners or business partners are personally protected from any risk or obligations incurred by the business entity, a business owner with unlimited liability – in the form of a sole proprietorship, for example – becomes personally responsible for all obligations and operations of the business entity.

Financial risk results from a business's potential to default on obligations to creditors and banks. If there is unlimited liability, a business owner needs to cover all obligations personally, even if the business cannot meet them.

Business risk results from the potential that a business lacks sufficient cash flow to cover its operating expenses. If the business owes some of these operating expenses to vendors, for example, a business owner with unlimited liability must pay these expenses or shut down the business.

Systematic risk refers to the economy-wide risk that businesses face during an economic downturn. If this occurs, the business may stop making money and its owner with unlimited liability must cover all expenses and obligations while the company corrects itself.

Finally, unsystematic risk refers to the firm-specific risk a business might face during an economic downturn. If this occurs, the business may again stop making money and its owner with unlimited liability is responsible for all expenses and obligations.

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