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Liability

Rajiv is the ...

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Rajiv is the sole owner of a shirt manufacturing factory. He took loan of Rs.30 lac from Jain finance company for expansion of his business. In beginning business was running well but later on he started facing losses and due to continuous losses he was not able to repay the loan. After receiving many reminders from finance company, Rajiv planned to close the business. He sold all his machines and other assets and collected Rs. 20 lac. He requested the finance Co. to settle the accounts by taking Rs. 20 lac. The finance company refused and plan to file a case against him in court. In court, Mr. Rajiv gave the argument that he has sold all his business assets and loan was taken by him for business and not for personal use. So finance company must settle the account by taking Rs. 20 lac. The court did not agree with the argument of Rajiv and gave the decision in favour of finance company and order Rajiv to pay full loan amount by selling his personal asset.
(a) Name the form of business carried by Rajiv?
(b) State the feature of sole Proprietorship which is kept in mind by court while taking decision.
(c) Is Rajiv's argument of saying he and business are separate entity is correct.

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Solution

(a) Sole Proprietorship- The sole proprietorship is the simplest business form under which one can operate a business. The sole proprietorship is not a legal entity. It simply refers to a person who owns the business and is personally responsible for its debts. A sole proprietorship can operate under the name of its owner or it can do business under a fictitious name.
(b) Unlimited Liability - According to legal status, business liabilities must be considered as the liabilities of the owner. Hence, the liability of the owner is unlimited. It means in case of insolvency, personal property of the owner can be sold for the recovery of its debts.
(c) There is no separate legal entity and thus no separate legal 'person.' This means that as a sole proprietor you will have unlimited personal responsibility for your business's liabilities. The business creditors can go against both the business's assets, including your bank account, car or house' or even personal assets. Hence as a sole proprietor Rajiv does not enjoy separate legal entity.

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