Final answer:
Corporations protect shareholders from liability by limiting obligations to the amount invested. Forming a small corporation generally allows owners to avoid personal liability for corporate debts, such as a bank loan, in case of bankruptcy.
Step-by-step explanation:
Corporations protect shareholders from liability by ensuring that shareholder obligation is limited to the amount they've invested in the company. This means that in the event of company bankruptcy, shareholders are not personally liable for the company's debts beyond their investment. When you form a small corporation, this legal structure typically allows you to avoid personal responsibility for repaying a bank loan if the corporation itself cannot meet its obligations and goes bankrupt.
Corporate stock and public firms offer ways to finance operations or expansions. Raising capital through the sale of stock or issuance of bonds provides a means for corporations to expand without exposing shareholders to increased liability. The sale of stock results in partial company ownership, but liability remains limited to the shareholder's investment.
It's important to note, however, that while shareholders are protected, directors and officers of a corporation may still have certain legal responsibilities that can affect how they conduct business. Plus, guarantees on loans or other specific legal arrangements might change the general rule of limited liability for shareholders or officers.