Question

Aruna, passionate about baking, opened a bakery shop. She borrowed ₹50,000 from her father and took a loan of Rs. 1,00,000 from a bank to start the business. To attract customers, she set the prices too low. Later, she noticed that the revenue earned was not enough to cover the costs. When the loan became due, she was unable to pay. The bank recovered the loan from Aruna’s personal assets, including her savings and property. Can Aruna’s personal property be called upon to pay her business debts? Give reason in support of your answer. State the feature of sole proprietorship highlighted in the above case.

Hint:

In sole proprietorship, owner’s personal assets are at risk due to unlimited liability.

Answer 1

Yes, Aruna’s personal property can be used to pay her business debts.

Reason:
In a sole proprietorship, the owner and the business are considered one and the same legally. Therefore, the owner has unlimited liability, meaning her personal assets can be used to settle business debts if the business assets are insufficient.

Feature of sole proprietorship highlighted:
Unlimited Liability —
The sole proprietor is personally liable for all the debts of the business, and creditors can claim the owner’s personal assets in case of business failure.