Which statement is true about a sole trader's liability?

Which statement is true about a sole trader's liability?

• A. The business has a separate legal identity
• B. The owner has unlimited personal liability for the debts
• C. The business cannot carry back losses
• D. The owner pays no tax

Answer: (B)

In a sole trader setup, there is no separate legal personality for the business—the owner and the business are the same legal entity. This means the owner is personally responsible for all the debts of the business, with unlimited liability. If the business can’t cover what it owes, creditors can seek the owner’s personal assets to satisfy the debts. The other statements don’t fit this fundamental point: a sole trader isn’t a separate legal entity, losses relief for tax doesn’t erase liability, and the owner does pay tax on the business profits.

In a sole trader setup, there is no separate legal personality for the business—the owner and the business are the same legal entity. This means the owner is personally responsible for all the debts of the business, with unlimited liability. If the business can’t cover what it owes, creditors can seek the owner’s personal assets to satisfy the debts. The other statements don’t fit this fundamental point: a sole trader isn’t a separate legal entity, losses relief for tax doesn’t erase liability, and the owner does pay tax on the business profits.