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Corporations, Limited Liability

ownership shares, proprietorships, personal assets, bankruptcy, new corporation

The key feature of corporations is limited liability. Unlike proprietorships and partnerships, the owners of a corporation are not personally responsible for any debts of the business. The only thing stockholders risk by investing in a corporation is what they have paid for their ownership shares, or stocks. Those who are owed money by the corporation cannot claim stockholders’ savings and other personal assets, even if the corporation goes into bankruptcy. Instead, the corporation is a separate legal entity, with the right to enter into contracts, to sue or be sued, and to continue to operate as long as it is profitable, which could be hundreds of years.

When the stockholders who own the corporation die, their stock is part of their estate and will be inherited by new owners. The corporation can go on doing business and usually will, unless the corporation is a small, closely held firm that is operated by one or two major stockholders. The largest U.S. corporations often have millions of stockholders, with no one person owning as much as 1 percent of the business. Limited liability and the possibility of operating for hundreds of years make corporations an attractive business structure, especially for large-scale operations where millions or even billions of dollars may be at risk.

When a new corporation is formed, a legal document called a prospectus is prepared to describe what the business will do, as well as who the directors of the corporation and its major investors will be. Those who buy this initial stock offering become the first owners of the corporation, and their investments provide the funds that allow the corporation to begin doing business.



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