Final answer:
The reduction of liabilities from the amount of income realized by the shareholder when a corporation distributes property is designed to prevent double taxation. This concept is a fundamental aspect of corporate law, which limits shareholder liability to only their investment in the corporation, encouraging investment and protecting personal assets.
Step-by-step explanation:
When a corporation distributes property and liabilities reduce the amount of income realized by the shareholder, it is primarily to prevent double taxation. Shareholder liability is limited to the amount they have invested in the corporation, which facilitates an environment where it's easier to raise or borrow money for expansion or other business purposes. Furthermore, the ability to choose to sell stock to finance company growth is an attractive option for many corporations.
Corporations provide individuals with the opportunity to purchase stock, which grants them partial ownership without holding them personally liable for the corporation's debts or legal issues. For entrepreneurs, incorporation offers a way to limit financial and legal liabilities, much like a sole proprietorship, while still permitting them to take risks without the fear of losing personal assets. This limitation of liability is essential for attracting investors and skilled managers necessary to start new industries and fuel economic growth.