Question

Problem 13-32 (LO. 2) Sea Green Enterprises reports the following assets and liabilities on its balance sheet. Net Book Value Fair Market Value Assets $600,000 $925,000 Liabilities 200,000 200,000 Sea Green has just lost a product liability lawsuit, with damages of $10,000,000 being awarded to the plaintiff. Although Sea Green will appeal the judgment, legal counsel indicates the judgment is highly unlikely to be overturned by the appellate court. The product liability insurance carried by Sea Green has a policy ceiling of $6,000,000. Assume any net assets of the company will be used to reduce the judgment. What is the amount of liability of Sea Green Enterprises and its owners if the business entity is a sole proprietorship, a partnership, a C corporation, and an S corporation

Answer 1

Since the negative result of the lawsuit is extremely high, Sea Green Enterprises will probably be liquidated:

If it is a C corporation:

• Sea Green will have to pay $725,000 (net assets)
• Its owners owe nothing

If it is an S corporation (similar to C corporation):

• Sea Green will have to pay $725,000 (net assets)
• Its owners owe nothing

If it is a partnership:

• Sea Green will have to pay $725,000 (net assets)
• Its owners will owe the rest = $4,000,000 - $725,000 = $3,275,000

If it is a sole proprietorship:

• Sea Green will have to pay $725,000 (net assets)
• Its owner will owe the rest = $4,000,000 - $725,000 = $3,275,000

Owners of sole proprietorships and partnerships are personally liable for all the business debts. While owners of S or C corporations are not personally liable for any of the business's debts.