Sole Trader or Sole Proprietorship — Practice Quiz

No Separate Entity means there is no legal distinction between owner and business; Unlimited Liability means the owner's personal assets can be used to pay business debts

Step 1: 'No Separate Entity' is a legal concept – it means the law does not recognise the business as different from its owner. Step 2: 'Unlimited Liability' is a financial concept – it means there is no cap on the owner's financial responsibility; personal assets can be seized to pay business debts. Step 3: While both are interrelated (no separate entity often leads to unlimited liability), they are distinct concepts. Step 4: Option A reverses the definitions, which is incorrect. Step 5: Option C wrongly equates them as the same concept – they are related but distinct. Option B correctly diff

Unlimited liability

Step 1: The merit 'Easy to Get Loans' states that banks are willing to lend to sole traders because 'legally debts can be recovered from his personal property.' Step 2: This means lenders feel secure because the trader's personal assets back the loan. Step 3: This very reason – personal assets being attached to business debts – is the definition of 'Unlimited Liability,' which is a major demerit. Step 4: So, the same feature (personal assets backing debts) creates both the merit (easy loans) and the demerit (unlimited liability). Step 5: This is a paradox – what makes loans easier to get simul

Loss by quick decision

Step 1: One of the merits of sole proprietorship is 'Prompt Decisions' – the owner can decide quickly without consulting anyone. Step 2: However, this same feature becomes a demerit when hasty decisions lead to losses. Step 3: The demerit 'Loss by Quick Decision' explains that while quick decisions are possible, the sole trader has no one to consult, so decisions may go wrong. Step 4: The saying 'Hurry makes curry' implies that rushing leads to mistakes, perfectly describing this demerit. Step 5: Limited managerial ability refers to lack of expertise, instability refers to business closure on

Social importance

Step 1: The merit 'Social Importance' specifically mentions two social benefits: (i) possibility of doing business with less capital and providing employment to others, and (ii) sole tradership prevents concentration of wealth in few hands. Step 2: By allowing many individuals to start small businesses, wealth gets distributed across society rather than accumulating with a few large corporations. Step 3: Tax advantage benefits the individual owner financially but does not address wealth distribution. Step 4: Ease of dissolution relates to winding up the business, not social wealth distribution