Sweetie Hughes decided to fulfill her lifelong dream of opening her own cupcake store, Sweetie's Cupcakes. Regions Bank approved a $50,000 unsecured line of credit for Sweetie's Cupcakes based on documents signed by Hughes as the sole proprietor. Regions Bank provided funds to Sweetie's Cupcakes for two years. After the twenty-fifth month, Sweetie's Cupcakes stopped making payments on the loan. The unpaid balance continued to accrue at a rate of five percent per year as provided by the loan documents. Regions filed suit against both Sweetie's Cupcakes and Sweetie Hughes to recover the unpaid principal and interest. Is Sweetie Hughes personally liable for the unpaid debt? Why?

Expert Answers

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Based solely on the information presented in this question, Ms. Hughes would clearly be liable for the unpaid debt.  The reason for this is the fact that Ms. Hughes owned Sweetie’s Cupcakes as a sole proprietor and signed the loan papers as such.

Sole proprietorships are a very common form of business ownership.  It is very easy to set up and is therefore attractive to many people who are starting their own businesses.  The problem with sole proprietorships is that they do not do a good job of shielding the owners from risk and liability.  As the link below tells us,

Both the business assets and the personal assets of the sole proprietor are subject to claims of the sole proprietorship's creditors.

In a sole proprietorship, there is no distinction between the person and the business.  All of the liabilities that the business incurs are the responsibility of the person who owns it.  The person’s personal assets can be used to pay obligations that the business has.  This is in contrast to a corporation, which is separate from the person.  If Ms. Hughes had created a corporation, she would not personally have been liable for the debts.  However, since she created a sole proprietorship, there is no protection for her and she must pay the debts.

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