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

While a sole proprietor can raise expansion capital through trade credit from suppliers and personal loans from financial institutions, the enterprise cannot issue debentures or shares to the public because it lacks a corporate legal entity separate from its owner.

Answer: Answer

Answer

The statement is TRUE.
The statement is correct because sole proprietorships are unincorporated enterprises. Corporate equity shares and debentures are legally restricted to incorporated companies (Private and Public Limited Companies). Therefore, sole traders must rely on personal funds, loans, plowback of profits, and supplier credit.

Step-by-Step Solution

1
Analyze the business structure and legal status of a sole proprietorship.
A sole proprietorship is an unincorporated business unit where the business and the owner are legally considered one and the same entity.
Understanding legal personality determines which capital sources and legal instruments are available to the business.
2
Evaluate the permissible sources of capital for a sole trader.
Permissible sources include initial equity (personal savings, gifts), debt/credit (trade credit, bank loans, personal borrowings), and retained earnings.
These debt and credit options rely on the individual owner's personal creditworthiness or vendor relationships.
3
Assess the restriction on issuing corporate securities like shares and debentures.
Issuing debentures and shares requires corporate registration under company law (e.g., Companies and Allied Matters Act in Nigeria), which sole proprietorships lack.
Without legal incorporation, a business cannot issue share certificates or corporate debt instruments.

Key Concept

Legal status and capital sourcing constraints of a sole proprietorship
Estimated Time:1m 30s
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Topics

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

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