Which statement best describes the liability of a sole trader?

Which statement best describes the liability of a sole trader?

• A. Limited liability; only share value is at risk.
• B. Unlimited liability; personal assets may be at risk.
• C. No liability.
• D. Liability depends on the number of employees.

Answer: (B)

For a sole trader, liability is unlimited because the owner and the business are one and the same legal entity. This means if the business cannot pay its debts, the owner’s personal assets—such as savings, a house, or a car—can be at risk to settle those debts. This lack of a separate legal personality is what makes liability unlimited. The idea that liability is limited would apply to situations where the business is a separate legal entity, like a limited company, where owners aren’t personally responsible for more than what they invested. Saying there is no liability is inaccurate because the business debts are a legal obligation of the owner’s business, and personal assets can be targeted if needed. And liability depending on the number of employees isn’t how liability works—the structure of the business determines liability, not its workforce size.

For a sole trader, liability is unlimited because the owner and the business are one and the same legal entity. This means if the business cannot pay its debts, the owner’s personal assets—such as savings, a house, or a car—can be at risk to settle those debts. This lack of a separate legal personality is what makes liability unlimited.

The idea that liability is limited would apply to situations where the business is a separate legal entity, like a limited company, where owners aren’t personally responsible for more than what they invested. Saying there is no liability is inaccurate because the business debts are a legal obligation of the owner’s business, and personal assets can be targeted if needed. And liability depending on the number of employees isn’t how liability works—the structure of the business determines liability, not its workforce size.