Corporate stockholders are not responsible for the debts of the corporation. This is MOST LIKELY an example of A) dividends. B) partnerships. C) limited liability. D) unlimited liability.
The Correct Answer and Explanation is:
The correct answer is C) limited liability.
Limited liability is a legal structure in which the personal assets of corporate stockholders are protected from the corporation’s debts. In other words, if the corporation goes into debt or faces legal actions, the stockholders’ personal wealth cannot be seized to pay off those debts. Their financial responsibility is limited to the amount they have invested in the company through purchasing shares of stock.
In a corporation, shareholders (or stockholders) own shares but do not manage day-to-day operations. They invest money into the company and in return receive dividends if the company is profitable, but they are not personally liable for any corporate liabilities beyond their investment in the stock. This is in stark contrast to other business structures, like partnerships, where the partners might be personally responsible for business debts and obligations.
Limited liability is one of the primary advantages of a corporation, as it allows investors to take risks without exposing their personal assets to company liabilities. This protection encourages investment, promotes business growth, and ensures that a corporation’s debts are not passed onto individual stockholders. For example, if a corporation goes bankrupt, stockholders can lose their investments (the value of their shares), but their personal property, like homes or savings, remains safe.
The other options:
- A) Dividends refer to the portion of the company’s profits paid to shareholders but have nothing to do with liability.
- B) Partnerships involve shared responsibility for debts, meaning partners can be personally liable.
- D) Unlimited liability refers to situations where the business owner or partner is fully responsible for all debts, which does not apply to stockholders in a corporation.
In summary, limited liability protects stockholders from being personally liable for the corporation’s debts.
