Question

6. Michael Crosby's dream was to be a chef. The first thing he did when he graduated from the Community College was to register his new catering business as a sole proprietorship. His first job was to prepare all the food for a birthday party. Unfortunately he left the cold meats out in the hot sun. Everyone at the party got food poisoning and each person was unable to work for three days. Michael was confident he would not have to pay any damages for negligence out of his own savings because his business was registered as a sole proprietorship. Is he correct? Why/Why not?

Answer 1

Dear student,

Michael Crosby is not correct.

A sole proprietor is not a separate identity under the law. It is registered under the owner's name. For establishing it,owner just need to have local license and registration. He/she can then,start with the business. Thus, bank account of owner is the bank accounts of sole proprietorship itself. Profit and loss both are gained in the name of owner and income is also taxed on his/her personal income tax return. He/she can combine his own property/wealth and business funds the way he/she wants.

Thus we deduce that, in case the business suffers, or owner lands into financial trouble, or any business debt is there, it will be consumed from owner's personal assets. So, in case any lawsuit is brought into the name of Michael Crosby firm, it will come under his name , and he is liable to pay for it, even if it was the very first job of his newly opened business. He is liable for all the losses/debts occured due to negligence on his part, and legally he will have to pay for it.