Can Sole Proprietorships Issue Bonds?

By Jeff Clements

A sole proprietorship is not an independent legal entity like a corporation or partnership. It is a business activity that is operated by an individual under his own name and personal responsibility; as such, the owner is free to borrow money to finance the venture. Although bonds are a form of debt, practically speaking, the sole proprietorship is not able to sell bonds like large corporations traditionally do simply because of the expense and complexity of complying with the applicable regulations.

Bond Debt

A bond is an interest-bearing form of debt in which the issuer agrees to make specified coupon payments over a period of years to compensate the lender for the time value of money and offer a return on the investment. Thus, a bond is usually a financial loan by an investor to a business such as a corporation or to a government entity.

Security Instrument

Bonds are classified as investment securities and are regulated by state and federal government regulatory authorities. To comply with all of the applicable rules and regulations, public or private bond sales are usually issued through very expensive and complicated processes. Accordingly, for financial reasons, small businesses like sole proprietorships can rarely ever justify pursuing a sale of bonds or other securities.

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Debt Financing

The most common type of debts that a sole proprietorship can assume are personal or business loans taken out in the name of the owner from authorized lenders. Additionally, although technically there is nothing preventing a sole proprietor from being able to issue bonds, it is usually cost prohibitive to do so and thus is very rarely done in practice.

Other Capital Raising

If a sole proprietorship wants to expand the business so it can eventually sell stock to raise money, it must incorporate and comply with various state and federal securities laws. These regulations are extremely complex and constantly changing. For purposes of practicality, most small businesses such as sole proprietorships rely on more traditional forms of credit and business profits to fund their expansion plans.

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References

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