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

An entrepreneur operates a small provisions store as a sole proprietor. During a severe business downturn, the enterprise incurs trade debts that exceed its total business assets. Under commercial law governing sole proprietorships, how are the remaining creditors' claims settled?

  1. The owner's personal assets can be legally attached and sold to satisfy the outstanding debts.Answer
  2. B
    The financial loss is strictly limited to the initial capital invested in the business entity.
  3. C
    The unsatisfied balance of debts is automatically absorbed by the corporate registry as uncollectible.
  4. D
    The creditors must forfeit the balance because the business unit enjoys corporate veil protection.

Answer

The owner's personal assets can be legally attached and sold to satisfy the outstanding debts.
A sole proprietorship is an unincorporated business entity with no separate legal personality. Consequently, the proprietor bears unlimited liability, meaning their personal assets can be seized and sold to pay off business debts if business assets are insufficient.

Step-by-Step Solution

1
Identify the legal structure of the business
The enterprise is structured as a sole proprietorship, which is an unincorporated business unit.
Understanding the legal form determines the liability framework governing debt settlement.
2
Apply the rule of legal entity and liability
The business and the owner are recognized as one legal person in the eyes of the law, conferring unlimited liability on the proprietor.
Without a separate legal identity, business debts are legally the personal debts of the proprietor.
3
Determine the consequence for unpaid business debts
Creditors have the legal right to claim personal property (such as houses or personal savings) to settle unpaid business liabilities.
Unlimited liability requires the owner to satisfy business obligations beyond the capital invested in the firm.

Key Concept

Unlimited Liability of a Sole Proprietorship
Estimated Time:1m 0s
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Topics

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

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