Which statement about the liability of a sole trader is true?

Which statement about the liability of a sole trader is true?

• A. The business has a separate legal identity from the owner.
• B. The owner has unlimited liability for all the business's debts.
• C. The business is automatically VAT-registered.
• D. Losses cannot be carried back against other income.

Answer: (B)

Unlimited personal liability is the defining feature of a sole trader. The business isn’t a separate legal entity; the owner and the business are the same in law. If debts cannot be paid, creditors can claim against the owner’s personal assets as well as business assets because there is no legal separation between the two. This is what unlimited liability means in practice. This is why the statement that the business has a separate legal identity is not true. The other points aren’t correct for a sole trader either: VAT registration isn’t automatic and depends on turnover and other rules, not on a fixed status of the business. Loss relief exists, so losses can be offset against other income or carried forward under the tax rules, rather than being unable to be carried back against other income.

Unlimited personal liability is the defining feature of a sole trader. The business isn’t a separate legal entity; the owner and the business are the same in law. If debts cannot be paid, creditors can claim against the owner’s personal assets as well as business assets because there is no legal separation between the two. This is what unlimited liability means in practice.

This is why the statement that the business has a separate legal identity is not true. The other points aren’t correct for a sole trader either: VAT registration isn’t automatic and depends on turnover and other rules, not on a fixed status of the business. Loss relief exists, so losses can be offset against other income or carried forward under the tax rules, rather than being unable to be carried back against other income.