Multiple Choice
In the context of corporations, what does the phrase 'limited liability' mean?
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12. Stockholders' Equity
Characteristics of a Corporation
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Which of the following is a unique characteristic of a corporation?
A
Ownership is not transferable
B
It is managed directly by all owners
C
Limited liability for its owners
D
Unlimited liability for its owners
Verified step by step guidance1
Understand the concept of a corporation: A corporation is a legal entity that is separate from its owners, meaning it can own assets, incur liabilities, and enter into contracts independently of its shareholders.
Review the characteristic of 'limited liability': Limited liability means that the owners (shareholders) of a corporation are not personally responsible for the debts or liabilities of the corporation. Their financial risk is limited to the amount they have invested in the corporation.
Compare the options provided: Analyze each option to determine which aligns with the unique characteristics of a corporation. For example, ownership in a corporation is transferable, and it is typically managed by a board of directors rather than directly by all owners.
Identify the correct characteristic: Limited liability is a defining feature of corporations, distinguishing them from other business structures like sole proprietorships or partnerships, which may have unlimited liability for owners.
Conclude that 'Limited liability for its owners' is the correct answer, as it is a unique and defining characteristic of a corporation.
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