Final answer:
Under Section 351 transactions, the corporation assumes the liabilities attached to transferred property, allowing for a tax-deferred transfer of assets. This facilitates easier expansion and growth, with shareholder liability limited to their investment. Access to capital is often more straightforward for corporations, who may sell stock to finance growth.
Step-by-step explanation:
The general rule for when a corporation assumes the liabilities attached to property transferred by a shareholder in a Section 351 transaction is that the corporation itself will take on these liabilities. This principle is important because it allows for the transfer of assets to a corporation by shareholders in a way that is tax-deferred, provided that certain conditions are met, under the Internal Revenue Code (IRC) Section 351. The importance of this rule lies in its ability to facilitate business growth and expansion, as it grants shareholders the ability to contribute property to the corporation without immediate tax implications.
Under Section 351, shareholders involved in the exchange can defer recognition of gain or loss if they are in control of the corporation immediately after the exchange, where control is defined as owning at least 80% of the total combined voting power of all classes of stock entitled to vote and at least 80% of the total number of shares of all other classes of stock of the corporation.
It is important to understand that shareholder liability in the context of a corporation is limited to the amount they have invested. This limited liability is one of the key benefits of incorporating, along with the easier access to capital, as corporations find it easier to raise or borrow money for various purposes like expansion. In some cases, a corporation may choose to sell stock to finance company growth, which can be an attractive option to maintain liquidity and spread the risk of business development among a larger group of investors.