I’m not even going to go into the irony of this error. Let’s just get straight to the problem and how to resolve it, shall we?
[the problem] You have a document in a private SharePoint site. When you try to share the document with an external email contact you get a messages saying: Sorry you are not allowed to share this with external users.
[the solution] By default SharePoint sites are configured to disallow sharing with external parties for security reasons. You’ll need to contact your SharePoint site administrator to change this. If you are the SharePoint site administrator, perform these steps to make the change:
[step 1] Log into Office365 as an account administrator.
[step 2] Click Apps->Admin.
[step 3] Click External Sharing->Sites on the left hand menu.
[step 4] Place a check in the box stating “Let external people access your sites” and select your desired option to restrict anonymous guest links. Then click Save.
Alternatively you can Change sharing settings for specific sites only by editing the site you want to make changes to in the site list.