Folake operates a retail textile store in Ibadan as a sole proprietor. Due to an economic downturn, the enterprise accumulates substantial debt owed to suppliers and defaults on repayment. When creditors file a suit to recover their funds, which of the following describes the legal liability position of Folake regarding these business debts?
- Her personal assets can be attached and sold by creditors to settle the debt because the enterprise lacks a separate legal personality.Answer
- BHer legal financial liability is restricted strictly to the amount of capital she originally invested in the store.
- CThe creditors can only recover debt by liquidating the debentures and shares issued by the enterprise.
- DThe debts are automatically written off upon closure because a sole proprietorship enjoys perpetual legal succession.
Answer
Her personal assets can be attached and sold by creditors to settle the debt because the enterprise lacks a separate legal personality.
In a sole proprietorship, the owner and the business entity are legally one and the same. Because the firm lacks a separate legal personality, the owner faces unlimited liability, meaning personal assets (such as private savings or real estate) can be legally claimed by creditors if business assets are insufficient to settle outstanding debts.
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Key Concept
Unlimited Liability and Legal Identity in Sole Proprietorship