Question

Relaxant Inc. operates as a partnership. Now the partners have decided to convert the business into a corporation. Which of the following statements is CORRECT?
a.Relaxant’s shareholders (the ex-partners) will now be exposed to less liability.
b.The company will probably be subject to fewer regulations and required disclosures.
c.Assuming the firm is profitable, none of its income will be subject to federal income taxes.

Answer 1

Answer:

a.Relaxant’s shareholders (the ex-partners) will now be exposed to less liability.

Explanation:

Legally, a corporation is a distinct entity separate from its owners. It has commercial rights to transact businesses, enter into contracts, and own properties. A corporation is a legal person and is subject to taxation; it can sue or be sued.

One distinctive aspect of a corporation is that its owners have limited liability to the debts of the business. If the company is unable to meet its obligations, the personal properties of owners cannot be attached to the debts. The owners of Relaxant Inc. will be exposed to less liability when they are shareholders as compared to when they were partners.  The liability of an individual shareholder is limited to the amount of their capital contribution