Lucy has organized her craft shop as a sole proprietorship. Her sister has warned Lucy about the legal principle holding her responsible for paying off all of the debts of the business. What is the name of this principle?

Unlimited liability

Explanation:

Unlimited liability means that

owners of businesses are liable to pay all the debts incurred by the business.

A sole proprietorship refers to owner of a business which has no distinct legal entity from its owner. It is not a legal entity because the owner can not be separated from the business and all the debts incurred by the business will be borne or paid by the owner.

An example of a sole proprietor is a barber who has his business registered with the corporate affairs commission. It therefore means that all the debts incurred by the business will be borned by the owner.