Which two sentences describe the characteristics of a corporation? The company is treated as a separate tax entity by law. The owners have to accept partial liability for debts. It is possible to raise large amounts of capital by selling company stock. The owners are known as shareholders.
The correct answer and explanation is:
The two sentences that describe the characteristics of a corporation are:
- The company is treated as a separate tax entity by law.
- The owners are known as shareholders.
Explanation:
A corporation is a distinct legal entity created under state law that exists separately from its owners. This separation means the corporation itself can own property, enter into contracts, sue or be sued, and importantly, it is treated as a separate tax entity. This means the corporation files its own tax returns and pays taxes on its profits independently of the individual owners.
Another fundamental characteristic of a corporation is that its owners are called shareholders (or stockholders). These shareholders own shares or stock in the company, which represent partial ownership in the corporation. This ownership structure allows the corporation to raise capital by selling stock to the public or private investors, which is a significant advantage over other business types such as sole proprietorships or partnerships.
The sentence “The owners have to accept partial liability for debts” is incorrect because one key advantage of a corporation is limited liability. Shareholders are generally not personally liable for the debts or obligations of the corporation beyond their investment in the stock. This limited liability protects personal assets of the owners.
The sentence “It is possible to raise large amounts of capital by selling company stock” is true but is more a benefit or advantage of the corporation rather than a defining characteristic of its legal nature. The defining features are the corporation’s legal status as a separate entity and its ownership by shareholders.
Summary
- Separate legal entity: The corporation exists independently of its owners and pays taxes separately.
- Ownership by shareholders: Owners hold shares of stock, representing their ownership in the company.
- Limited liability: Shareholders are not personally responsible for the company’s debts.
- Ability to raise capital: Selling stock allows corporations to raise funds, though this is an advantage, not a defining characteristic.
These characteristics distinguish corporations from other business forms like partnerships and sole proprietorships.