Which of the following is not true of a corporation?
a. It may enter into binding legal contracts in its own name.
b. It may sue and be sued.
c. The owners are personally liable for corporate actions.
d. It may buy, own, and sell property
The correct answer and explanation is:
Correct Answer: c. The owners are personally liable for corporate actions.
Explanation:
A corporation is a legal entity that is separate and distinct from its owners. This distinction provides several unique characteristics and advantages, as outlined in the options provided. Below is an explanation of why option c is incorrect and the other options are correct.
1. Corporations can enter into binding legal contracts (Option a):
A corporation, as a separate legal entity, has the ability to enter into contracts under its own name. This allows it to conduct business independently of its owners, including agreements with suppliers, employees, and customers. This feature is essential for day-to-day operations.
2. Corporations can sue and be sued (Option b):
Because a corporation is legally separate from its owners, it has the legal capacity to be involved in litigation. It can initiate lawsuits to enforce its rights or be sued if it breaches its obligations. This aspect reinforces the corporation’s ability to function independently.
3. The owners are not personally liable for corporate actions (Option c):
One of the primary benefits of incorporation is limited liability. Shareholders (owners) are only liable up to the amount they have invested in the corporation. They are not personally responsible for debts or actions taken by the corporation, except in cases where legal doctrines such as “piercing the corporate veil” apply due to fraud or misconduct.
4. Corporations can buy, own, and sell property (Option d):
As a legal entity, a corporation has the capacity to own assets such as real estate, intellectual property, or inventory. This ownership is distinct from the personal assets of its shareholders.
Summary:
The incorrect statement is option c, as it contradicts the core principle of limited liability. This principle is foundational to corporations and a key reason why businesses choose to incorporate.