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Zorluk: ZorSole Proprietorship: Features, Capital Sources, Merits, and Demerits

Tunde operates a flourishing bakery in Lagos as a sole proprietor. To fund a major expansion into two new cities, he requires significant long-term capital beyond his personal savings and retained earnings. He is considering issuing debentures to the general public while maintaining his current sole proprietorship structure. Which of the following statements correctly evaluates Tunde's proposed financing strategy?

  1. He cannot issue debentures because a sole proprietorship lacks a separate legal entity status and cannot issue corporate debt securities.Cevap
  2. B
    He can issue debentures provided he secures approval from general partners who share his unlimited liability.
  3. C
    He can issue debentures directly on the money market as short-term commercial debt to suppliers.
  4. D
    He cannot issue debentures unless he first files Articles of Association with the Corporate Affairs Commission while retaining sole ownership.

Cevap

He cannot issue debentures because a sole proprietorship lacks a separate legal entity status and cannot issue corporate debt securities.
Sole proprietorships lack legal personality distinct from their owners. Consequently, they cannot issue corporate securities such as debentures or shares to raise long-term capital from the public. A sole proprietor's sources of capital are restricted to personal savings, loans, trade credit, and retained profits.

Adım Adım Çözüm

1
Analyze the legal features and capital sources of a sole proprietorship.
A sole proprietorship is an unincorporated business entity where the owner and the business are legally viewed as the same person.
Understanding legal entity status determines what financial instruments a business can legally issue.
2
Evaluate the nature of debentures as a corporate capital source.
Debentures are long-term debt instruments issued by incorporated bodies (limited liability companies).
Unincorporated entities like sole proprietorships are limited to personal savings, trade credit, bank loans, and plough-back profits.
3
Select the correct evaluation of the proposed strategy.
Tunde cannot issue debentures under a sole proprietorship structure because the business is not incorporated.
To issue corporate securities like debentures or shares, the business must be converted into a public limited company.

Anahtar Kavram

Capital sources and legal status of a sole proprietorship
Tahmini Süre:1m 30s
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Sole Proprietorship: Features, Capital Sources, Merits, and Demerits

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