A sole proprietorship is a type of organization where the business owner has an unlimited liability. This means that while dissolving the business or paying debits debts, the owner of a sole proprietorship must sell his/her personal property to pay off the debts.

For example, Mr. X opens a sole proprietorship business. His total assets are worth $10,000 and he has debts of $11,000 at the time he dissolves his company. After paying off his debits, Mr. X has a shortage of $1,000. As he's in an unlimited liability situation, he has to pay his remaining $1,000 in debts by using his personal property. This is an example of unlimited liability where the legal obligations are extended to the owner's personal as well as his/her business assets.