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

Which of the following represents the primary source of initial capital used by a sole proprietor to establish a small business?

  1. Personal savings and micro-loans from family or friendsAnswer
  2. B
    Issuance of debentures to members of the general public
  3. C
    Sale of equity shares on the floor of the Stock Exchange
  4. D
    Pooling of capital contributions from up to twenty general partners

Answer

Personal savings and micro-loans from family or friends
The correct option correctly identifies personal savings and informal borrowing from friends and relatives as the chief sources of capital for a sole proprietor, reflecting the individual ownership structure of the business.

Step-by-Step Solution

1
Identify the legal structure of a sole proprietorship
A sole proprietorship is an unincorporated business owned and controlled by a single individual.
Because it lacks limited liability status and corporate legal identity, it cannot access public capital markets.
2
Evaluate the financial sources available to an individual owner
Initial financing is restricted to personal equity (savings), personal borrowing, or trade credit.
Financial institutions and public markets restrict corporate financial instruments to incorporated businesses.

Key Concept

Sources of Capital for Sole Proprietorships
Estimated Time:45s
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Topics

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

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