The liability of the sole proprietorship for the

obligations assumed
by Nicu oltoianu
The basics of sole proprietorships
A sole proprietorship, also known as the sole trader or simply a proprietorship is a type of
business entity that is owned and run by one individual and in which there is no legal distinction
between the owner and the business. The owner receives all profits (subject to taxation specific
to the business) and has unlimited responsibility for all losses and debts. Every asset of the
business is owned by the proprietor and all debts of the business are proprietors.
There are many definition of this notion in the doctrine. For example, Glos and Baker write
that A sole proprietorship is a business owned by one person who is entitled to all of its profits,
and Reed and Conover say The single or the sole proprietorship is a business owned and
controlled by one man even though he may have many other persons working for him
In the United States, a sole proprietor may use a trade name or business name other than his
or her legal name. In many jurisdictions there are rules to enable the true owner of a business
name to be ascertained. Also in the United States, there is generally a requirement to file a doing
business as statement with the local authorities. In the United Kingdom the proprietors name
must be displayed on business stationery, in business emails and at business premises, and there
are other requirements.
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. In different countries, a sole proprietorship
can operate under the name of its owner or it can do business under a fictious name. The fictious
name is simply a trade name it does not create a legal entity separate from the sole proprietor
owner.
The sole proprietorship is a popular business form due to its simplicity, ease of setup and
nominal cost. A sole proprietor needs only register his or her name and secure local licenses, and
the sole proprietor is ready for business. A distinct disadvantage, however, is that the owner of a
sole proprietorship remains personally liable for all the businesss debts. So, if a sole proprietor
business runs into financial trouble, creditors can bring lawsuits against the business owner. If
such suits are successful, the owner will have to pay the business debts with his or her own
money.
The owner of a sole proprietorship typically signs contracts in his or her own name, because
the sole proprietorship has no separate identity under the law. The sole proprietor owner will
typically have customers, write checks in the owners name, even if business uses a fictious
name. Sole proprietors can, and often do, commingle personal and business property and funds,
something that partnerships, limited liability companies and corporations cannot do. Sole
proprietorships often have their bank accounts in the name of the owner. Sole proprietorships
need not observe formalities such as voting and meetings associated with the more complex
business forms. Sole proprietorships can bring lawsuits (and can be sued) using the name of the
sole proprietor owner. Many businesses begin as sole proprietorships and graduate to more
complex business forms as the business develops.
Tax implications
Because a sole proprietorship is indistinguishable from its owner, sole proprietorship
taxation is quite simple. The income earned by a sole proprietorship is income earned by its
owner. In the United Kingdom, a sole proprietor reports the sole proprietorship income and/or
losses and expenses by filling out and filling a Schedule C, along with the standard Form 1040.

Suing and being sued

Sole proprietors are personally liable for all debts of a sole proprietorship business. Lets
exmine this more closely, because the potential liability can be alarming. Assume that a sole
proprietor borrows money to operate, but the business loses its major customer, goes out of
business, and is unable to repay the loan. The sole proprietor is liable for the amount of the loan,
which can potentially consume all his/her personal assets.
Imagine an even worse scenario: the sole proprietor (or even one its employees) is involved
in a business-related accident in which someone is injured or killed. The resulting negligence
case can be brought against the sole proprietor owner and against its personal assets, such as
bank acounts, retirement accounts and even its home. Accidents do happen, and businesses go
out of business all the time. Any sole proprietorship that suffers such an unfortunate
circumstance is likely to quickly become a nightmare fot its owner.
If a sole proprietor is wronged by another party, he can bring a lawsuit in his own name.
Conversely, if a corporation or limited liability company is wronged by another party, the entity
must bring its claim under the name of the company.
Advantages of a sole proprietorship
Owners can establish a sole proprietorship instantly, easily and inexpensively.
Sole proprietorships carry little, if any, ongoing formalities.
A sole proprietor need not pay unemployment tax on himself or herself (although he or
she must pay unemployment tax on employees).
Owners may freely mix business or personal assets.
Owners have complete control over all aspects of his business and can take any
managerial decisions that he/she wants to take.
Owners have the ability to raise capital either publicly or privately
Disadvantages of a sole proprietorship
Owners are subject to unlimited personal liability for the debts, losses and liabilities of
the business.
Owners cannot raise capital bu selling an interest in the business.
Raising capital for a proprietorship is more difficult because an unrelated investor has
less peace of mind concerning the use and security of his or her investment and the
investment is more difficult to formalize, other types of business entities have more
documentation.
Sole proprietorships rarely survive the death and incapacity of their owners and so do not
retain value.
As a business becomes successful, the risks accompanying the business tend to grow. One of
the main disadvantages of the sole proprietors is unlimited liability where the owners personal
assets can be taken away. This is particularly true for liabilities created by employees; a
corporation only partially shields an owner or officer for his own actions according to the
principle of piercing the corporate veil. Another disadvantage is a lack of continuity. The
entreprise may be crippled or terminated if the owner becomes ill. Since the business is the same
legal entity as the proprietor, it ceases to exist upon the proprietors death. Because the enterprise
rests exclusively on one person, it often has difficulty raising long-term capital.
Sole proprietorship insolvency
Sole proprietorship insolvency occurs when the business cannot meet financial obligations.
It may be that bills cannot be paid on time, leading to debts which eventually attract legal actions
by creditors. There are a number of factors that can lead to sole proprietorship insolvency. These

can include late invoicing for goods or services, accepting orders that exceed its financial
capacity to deliver, failure to recover debts, excess inventory and unsuitable credit arrangements.
In the Republic of Moldova, sole proprietorship is a basic form of doing business. Under the
Law on enterprise and entrepreneurship of the Republic of moldova, business (entrepreneurial)
activity is the activity of production of goods, performance of works and provisions of services
carried out independently by citizens and their associations on their own behalf, risk and
responsibility for the purpose of obtaining a permanent source of income. A sole proprietorship s
formed on the basis of the property of an individual or his family. This form of doing business
entails unlimited liability for sole proprietors and deems the property of the business to be the
owners joined property. Foreign citizens and stateless persons practicing business activity in
Moldova benefit the same rights as Moldovan citizens.
According to article 1 par. (2) of the Law on insolvency of Moldova, the mentioned law is
applicable to enterprises, regardless of their type of property and legal form of organization, sole
proprietorships, including entrepreneurial patent holders, banks and financial institutions,
insurance companies, investment funds, trust companies, non-profit companies in insolvency
proceedings, registered in the Republic of Moldova as established.
From the legal provisions stated above, can be inferred that a lawsuit on insolvency can be
filed against individuals which practice entrepreneurial activity in the Republic of Moldova, be it
a citizen of Moldova, a foreign citizen or a stateless person.
Entrepreneurial activity can be legally practiced in Moldova by such individuals as founders
of sole proprietorships, farms, as well as entrepreneurial patent holders.
Sole proprietorships are registered by regional branch authorities of the Moldovan State
Registration Chamber. For the purpose of state registration, a sole proprietor shall submit to a
regional branch authority of the Registration Chamber the documents stipulated by current
Moldovan legislation. Registration of farms is done bu town halls. Tax Inspectorates keep track
of the entrepreneurial patent holders, but in the absence of Tax Inspectorates, patent holders are
registered by the town halls.
The insolvency procedure cannot be filed against an individual who practice indeed
entrepreneurial activity but is not registered as established by law. Such kind of person can be
individually liable. Unlike the insolvency procedure, within individual liability the creditor who
submitted the enforcement title first has priority in relation to other creditors.
The insolvency procedure is filed on the basis of the introductory application. The general
basis of bringing a lawsuit against the debtor is the default of the debtor. The special basis of
filing the insolvency procedure is the debtors indebtedness.
Compozition and size of the debtors obligations are those existing at the time of the
application, if the law does not provide otherwise. To determine the existence of the basis to
initiate the process of insolvency are taken into account
the size of contractual obligations of the debtor, including debt loan plus interest.
The size of obligations to the public national budget as provided by law without penalties
and other financial sanctions
The right to file the lawsuit have the debtor, creditors and other persons specified by law.
The debtor is entitled to file the application in a situation where there is a risk of a default entry
when, predictably, will not be able to perform pecuniary obligations at maturity. The debtor is
required to file writ if any of the general or specil grounds occur. The debtor is required to
submit the application and if:
Full implementation of accrual of one or more creditors may result in failure to meet full
maturity claims of other creditors
The liquidation, which is performed under the laws, it is clear that the debtor can not
fully satisfy creditors claims
The debtor is required to submit the request immediately, but no later than the expiration of
one month from the date of occurrence of the grounds of insolvency. The debtor is responsible

for intentional and fictious bankruptcy and should conpensate the damages caused to creditors by
filling the application of insolvency.
In the application of the debtor must be given:
a) tax code and numbers of all bank accounts of the debtor;
b) the creditors, the amount of interest and penalties thereon;
c) the grounds of claims and terms of their execution, specifying the amount of damage claims
arising out of life and health, and the claims against the debtors employees;
d) the amount of debt to the public national budget;
e) motivation of the basis of insolvency;
f) information about the lawsuit claims of the debtor, received for consideration by the courts, as
well as writs for execution on the debtors assets;
g) information about the debtors assets including cash and his receivables;
The individual debtors request will also reflect the situation of other duties not related to the
business.
To the application of the debtor are attached:
a) a copy of the status of the debtor;
b) a list of debtors members;
c) the balance sheet date of the last financial report;
d) documents providing the composition and value of goods of the individula debtor (individual
entrepreneur);
e) data from public records of the debtors assets, including his pledged assets;
f) last audit report of the results of financial activity control of the debtor;
g) a list of creditors and debtors, accounts payable and receivable and specifying addresses and
particulars of creditors and debtors;
h) other evidence confirming the information specified in the application.
The court shall take all necessary measures to prevent the modification of the status of
debtors assets in the period before filing the bankruptcy process. In addition to assurance
measures provided by the Code of Civil Procedure, the court shall apply the following measures
to ensure:
a) appoint a temporary administrator;
b) removes the debtor from the management of his assets or issues the prescription that decisions
regarding management of assets will be taken only with the prior consent of the provisional
administrator;
c) seize all assets of debtors business and correspondence;
d) suspends enforcement of the debtors assets;
e) put under ban alienation by the debtor of his property or decides that it can be sold only with
the express consent of provisional administrator;
If these measures of insurance referred to are not sufficient, the court may order forced
bringing of the debtor and hearing him in custody. Violation by the debtor of court orders leads
to voidance of concluded acts.
The court shall notify immediately about measures to ensure the State Register of individual
entrepreneurs, the Register of immovable property and other registers which record pledges,
banks, local land authorities, customs, post offices, rail stations, port and customs warehouses
and other storage places in the district where the debtor is located to cease any operation of the
debtors assets, asking them also to transmit the debtora correspondence and any incoming
communication on his address.
In addition to the notification, the court may order the publication of the enacting of
insurance measures. The conclusion of the court on the application of insurance may be appealed
by the debtor. Upon appointment, the temporary administrator shall prepare and submit as soon
as possible to the court a report on the implementation of measures to secure. If the debtor is
removed from his property management. Provisional manager is forced to sell perishable goods
or goods subject to imminent depreciation and submit to the bank, in the debtors account,

proceeds from these sales. After stamping by the court, accounting registers and securities raised
from the debtor shall be deposited to the court by the provisional administrator. This may allow
the administrator to temporarily retain the records for documentation.
Preliminary actions to initiating the insolvency process
Measures to prepare preliminary examination of debtor insolvency proceedings shall be
taken by the court under the Code of Civil Procedure and the insolvency law. If the debtor
submits objections, including reference to the application of the creditor, the court shall consider
these circumstances before issuing the decision on instituting bankruptcy process. In respect, the
court shall hear the debtor, creditors who have filed the application and, where appropriate,
experts, specialist, temporary administrator, if one has been appointed. If the individual debtor is
not in the country or can not be heared from other reasons, andd his hearing can substantially
drawl the progress of the insolvency process, the court may hear the debtors representative or
relatives. After examining the debitors objections on the application, the court shall issue a
rulingthat will contain in particular the size of the claims on which the debtors objections were
deemed unfounded. This conclusion will confirm the size of creditors claims who have
submitted application. The court shall decide, o the basis of the assessment of insolvency
groundings, and acts found in the examination of the application, the process of initiating
insolvability or the rejection of the application,
If the debtor dies after filing individual bankruptcy process, the process continues, the heirs
of the debtor in the process taking place in the process even if they accepted the inheritance to
the extent that liabilities do not exceed the inheritance mass assets. If there are several heirs, they
will be represented in the insolvency by the debtors representative designated heir. If such
representative is not appointed within 10 days after the death of the debtor, the court shall
appoint a person to represent the debtor.
The decision to initiate the process of bankruptcy may be appealed by the debtor. The
decision to reject the application may be appealed by the parties at trial. The court may raise the
mesures to ensure in sccordance with the Code of Civil Procedure and insolvency law.
Debtor mass, claims and classes of creditors
Debtor mass includes all assets of the debtor at the time of initiating the insolvency process
and those which he acquires and recover during the process. Property owned jointly with third
parties is provisionally reported in debtor mass, regardless of agreements concluded by them.
Debtors property division is made by the administrator if the court establishes real right of third
parties to the goods. Property owned as common property in condominium of the spouses is
included in the debtor mass. The debtor is liable only to its share in the common property in
condominium. The court will divide its share of the common property in accordance with the
Civil Code.
In the debtor mass are not included goods which are not tradable, goods that under the Code
of Civil Procedure are not liable for enforcement and patrimonial inalienable rights of the debtor.
If in the debtor mass are goods excluded from the civil circuit, the administrator shall notify the
owner.
Whether the creditors have a lien on a conventional or legal right or not, they can be divided
into secured creditors and unsecured creditors.
Unsecured creditors are non-guaranteed creditors who have at the time of initiating the
insolvency process a pecuniary claim against the debtor. The claim of unsecured creditors is
considered born until the moment of initiating the insolvency process where underlying
relationships have emerged so far.
Unsecured debts are divided into the following ranks:
1) claims of health damaging or causing death;
2) the salaries owed to employees and remunerations payable under copyright;

3) claims for loans guaranteed by the ministry of Finance, internal and external loans granted
under state guarantee, tax payment and other obligations to the national public budget;
4) claims for refund of debt to state material reserves;
5) other unsecured claims that are not low-level;
6) low-level unsecured debts have the following classes:
a) interest on unsecured creditors claims calculated after the lawsuit was filed;
b) expenses incurred by some unsecured creditors in the process of insolvency;
c) fines, penalties and recover of damages, including those caused by defaults or their improper
execution;
d) free benefits claims of the debtor;
e) claims related to repayment of a shareholder loan capitalization nad other such claims.
Unsecured debts run under their rank. Claims of the next rank run only after full execution
of the claims of previous rank. In case of mass receivables shortage, distribution of goods within
the same class is proportional. This provisions shall apply accordingly to the low-level creditors.
The creditors who have a lien on a conventional or legal right over one goof from the debtor
mass are entitled to prior satisfaction of the borrowed capital, interest and related expenses on
the pledged assets account. This provision also applies to:
a) the creditor who holds an asset or a title to ensure his right
b) the creditor who has a lien
c) State, in case of any collections of taxes and duties on goods that, by law, serve as a guarantee
of payment.
If the secured creditors waive their right to claim priority or if the secured claim is not
executed entirely from the value of the pledged asset, they become unsecured creditors for the
claim which has no priority or for the part of the claim uncovered in priority.
During the process of insolvency is prohibited enforcement from the debtor mass for
unsecured creditors indovodually.
Whether the application is accepted, the debtor is obliged to provide explanations and
information necessary for a decision on the application. The debtor has the right and obligation
to attend the bancruptcy court to the creditors and/or creditors committee meetings. The debtor
is obliged to provide information and explanations to the court, administrator, committee of
creditors and the creditors of the insolvent relevanr reports, to make known facts likely to lead to
liability for a crime or offence. Such information and explanations can not be used in a criminal
or administrative process except with permission of the debtor. It must also support the
administrators task and duties and is obliged to appear in court when cited, to provide
information and explanations and to cooperate.
Procedural liability of the debtor
After filing bankruptcy process, the court may order the debtor that it does not leave the
territory of the Republic of Moldova without the express permission of the court if there is
evidencec that he could hide or escape from participating in the process.At the request of
creditors or the administrator, the court may order such prohibition and before filing the
bankruptcy process as a measure of insurance.
If the debtor evades from obligations under the law, the court, at the request of the
administrator, or committee meeting of creditors or ex officio, may waive the debtors right to
manage the property, if he does, may prohibit him from leaving his place of residence without
the express permission of the court or other measures to ensure the compliance with the law.
These prohibitions are valid throughout the insolvency process, save for the case when the court
determines otherwise.
Upon termination of the insolvency, unsecured creditors may submit their claims without
restriction to the debtor. Unsecured creditors whose claims have been validated and are not
disputed by the debtor at the meeting of validation may require insofar they have not been
satisfied within the insolvency process, their enforcement under registration in the table as under

a writ of execution. An uncontested claim is treated as a contested claim whose appeal was
rejected by the court.
Disqualification of debtor
If it is found that the individual debtors fault or negligence contributed to the occurrence of
his insolvency, by a court decision on cessation of insolvency that person may be deprived of the
right:
a) to be elected or appointed to public office or to continue to hold such office;
b) to act as trustee in bancruptcy or liquidation process;
c) to be a member of a management or supervisory body of a company.
The disqualification applies accordingly to the citizens of the Republic of Moldova and to
foreign national in the basis of their legal status in the Republic of Moldova.
Individual debtor relief
After payment of the unsecured creditors, individual debtor is relieved from further
execution of creditors claims, save for the claims by creditors to recover alimony, damage to
health or other personal claims, as well as other personal claims which were not submitted, were
not satisfied or partially satisfied within the insolvency process shall remain valid even after the
insolvency process, and may be submitted in full or, respectively, the unsatisfied part.
If it is found that the individual debtor has concealed from execution or illegal sent some of
its assets to a third party, a creditor whose claims has not been satisfied in insolvency
proceedings may request enforcement of its claim on account of these goods even after the
process.
References:
1) The Insolvency Law of the Republic of Moldova
2) The Law on enterprise and entrepreneurship of the Republic of Moldova
3) The Law on state registration of legal entities and individual entrepreneurs
4) Internet