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Difficulty: EasySole Proprietorship: Features, Capital Sources, Merits, and Demerits

Ade operates a small retail enterprise as a sole proprietor in Ibadan. If the business fails and its total liabilities exceed its business assets, which of the following best describes Ade's legal obligation to his creditors?

  1. He is personally liable for all outstanding debts, meaning his private assets can be seized to settle creditors.Answer
  2. B
    His financial liability is strictly limited to the capital he originally invested in the retail shop.
  3. C
    Creditors can only claim assets registered directly under the business name.
  4. D
    The outstanding debts are automatically transferred to government regulatory agencies upon business liquidation.

Answer

He is personally liable for all outstanding debts, meaning his private assets can be seized to settle creditors.
A fundamental feature of a sole proprietorship is unlimited liability. Because the business is not incorporated, it lacks a separate legal personality from its owner. Therefore, if business assets fall short of meeting outstanding debts, the owner is legally bound to settle remaining liabilities using personal assets.

Step-by-Step Solution

1
Identify the key feature of a sole proprietorship regarding business liabilities.
A sole trader has unlimited liability because there is no legal separation between the owner and the business.
The law views the sole proprietor and the business as a single legal entity.
2
Determine the practical impact of unlimited liability when business assets are insufficient to cover debts.
The owner's personal property (such as personal savings, vehicle, or personal belongings) can be used to pay off creditors.
Creditors have full legal recourse against the owner's personal estate.

Key Concept

Unlimited Liability in Sole Proprietorship
Estimated Time:45s
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Topics

Sole Proprietorship: Features, Capital Sources, Merits, and Demerits

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