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

A sole trader who operates a grocery shop in Enugu suddenly passes away, causing the business to immediately cease operation because it lacks a separate legal identity from its owner. Which demerit of a sole proprietorship is demonstrated in this scenario?

  1. Lack of continuity of existenceAnswer
  2. B
    Unlimited liability for business debts
  3. C
    Inability to issue shares and debentures to the public
  4. D
    Requirement to publish audited financial statements publicly

Answer

The demerit demonstrated is the lack of continuity of existence.
A sole proprietorship lacks a separate legal personality. Consequently, when the sole proprietor dies or becomes incapacitated, the enterprise legally and operationally ceases to exist, illustrating a lack of continuity of existence.

Step-by-Step Solution

1
Analyze the core event described in the scenario.
The business shuts down immediately after the death of the owner because it does not possess legal personality separate from the proprietor.
Understanding legal identity helps connect owner mortality to business life span.
2
Identify the corresponding sole proprietorship limitation.
The inability of an enterprise to survive the death or incapacitation of its owner is termed lack of continuity of existence (or lack of perpetual succession).
This directly flows from the lack of a separate legal entity.

Key Concept

Lack of continuity of existence in a sole proprietorship due to absence of separate legal entity status
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Topics

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

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