Question

Joe Smith owns a bookstore as the sole proprietor. He is also a partner in a hotel, which borrowed $100,000 from the bank. Which of the following statements is true?

a) Joe Smith's personal assets are at risk for the hotel's debt.
b) Only the hotel's assets are at risk for the borrowed amount.
c) The bank can only go after the hotel's profits, not Joe Smith's personal assets.
d) Joe Smith's liability is limited to the value of the bookstore.

Answer 1

Joe Smith's personal assets are indeed at risk for the hotel's debt because he is a partner in the hotel and a sole proprietor does not have limited liability. The correct answer is a) Joe Smith's personal assets are at risk for the hotel's debt.

Step-by-step explanation:

The student asked whether Joe Smith's personal assets are at risk due to a debt incurred by a hotel business in which he is a partner. The correct statement is: a) Joe Smith's personal assets are at risk for the hotel's debt. As a sole proprietor of the bookstore and a partner in the hotel, Joe does not enjoy limited liability. Therefore, in the case of debts incurred by the hotel, both the hotel's assets and Joe Smith's personal assets could be at risk. It is important for students studying business and finance to understand the implications of different business structures on personal liability.

As a sole proprietor, Joe Smith is personally liable for the debts of his business. This means that his personal assets, such as his savings, house, and car, can be used to repay any debts incurred by the hotel. Even though the hotel is a separate entity, Joe Smith's ownership and involvement in it make him personally responsible for its debts.