Nneka operates a successful commercial agro-processing enterprise in Enugu as a sole proprietor. To finance the acquisition of automated industrial milling machinery for a major expansion, she intends to raise long-term capital by issuing debentures to the public and selling preference shares to private investors while maintaining full personal control of the firm. Which of the following best evaluates Nneka's proposed financing strategy in light of the legal features and capital structure of a sole proprietorship?
- The proposal is legally unfeasible because an unincorporated sole proprietorship lacks the statutory authority to issue shares or debentures to raise capital.Answer
- BThe proposal is feasible provided she issues non-voting preference shares, which supply long-term capital without diluting her operational control.
- CThe proposal is legally valid because sole proprietors can issue debentures to commercial lenders as long as the owner retains unlimited liability.
- DThe proposal requires only the registration of Articles of Association with the Corporate Affairs Commission to authorize the public sale of securities.
Answer
The proposal is legally unfeasible because an unincorporated sole proprietorship lacks the statutory authority to issue shares or debentures to raise capital.
A sole proprietorship is an unincorporated enterprise owned by one person. Because it lacks a separate legal entity from its owner, it cannot issue capital market securities such as shares (equity) or debentures (long-term corporate debt). Its sources of capital are strictly limited to personal savings, loans from friends or commercial banks, trade credit, and ploughed-back profits. Consequently, attempting to raise expansion funds via shares or debentures is legally unfeasible for a sole trader.
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Key Concept
Capital Sources and Legal Limitations of a Sole Proprietorship