Question

Which of the following statements is correct?

a) One advantage of forming a corporation is that equity investors are usually exposed to less liability than in a partnership.
b) Corporations face fewer regulations than sole proprietorships.
c) One disadvantage of operating a business as a sole proprietor is that the firm is subject to double taxation, at both the firm level and the owner level.
d) It is generally less expensive to form a proprietorship than a corporation because, with a proprietorship, extensive legal documents are required.
e) If a partnership goes bankrupt, each partner is exposed to liabilities only up the amount of his or her investment in the business

Answer 1

The correct statement is that forming a corporation provides the advantage of limiting shareholders' liability to the amount they've invested, unlike in partnerships where personal liabilities can exceed one's investment.

Step-by-step explanation:

The correct statement among the options you've provided is: a) One advantage of forming a corporation is that equity investors are usually exposed to less liability than in a partnership.

When individual entrepreneurs incorporate their businesses, they limit their personal financial and legal liabilities compared to other business structures such as a sole proprietorship or partnership. Shareholders in a corporation are typically only liable up to the amount they have invested, protecting their personal assets from the business's debts and potential lawsuits. In contrast, a sole proprietorship exposes the owner to direct personal liability, and partners in a partnership can be held personally responsible for the debts and legal obligations of the business.

Corporations do, however, face more regulations than sole proprietorships and involve a more complex and costly setup process. They are also subject to double taxation, where profits are taxed at the corporate level and again as dividends to shareholders. Sole proprietorships do not face double taxation as the income is taxed only at the personal level. Contrary to one of the statements, if a partnership goes bankrupt, each partner can be exposed to liabilities that exceed their investment in the business.