Corporation: A business concern where there is a separate legal entity, and are owned by shareholders, are classified as corporation. Transfer of ownership and raising funds are easy in this form of organization. The liabilities of the stockholders to its creditors is limited up to their invested capital amount in the corporation.
To find: which characteristic of a corporation is a disadvantage.
Answer to Problem 1QC
Explanation of Solution
Explanation for correct answer:
A corporation is entitled to double taxation. The corporation is required to pay the taxes based on its net income. In addition, the dividend income that are distributed to the shareholders are also taxable. Hence, this option is correct.
Explanation for incorrect answers:
- Option (a) Mutual agency: Mutual agency is an advantage for a corporation. Unlike ,
partnership and sole proprietorship, there is no mutual agency in a corporation as there is no mutual agreement between the stockholders’ and the corporation to form a corporation. The stockholders’ cannot bind the business into a contract. In a corporation form of business, the company is not liable for any unethical or immoral activities done by the stockholders. Hence, this option is incorrect. - Option (c) Limited liability: The liability of a corporation is limited and it is an adavantage. It means that the liability of a stockholders is limited only to the extent of their investment amount. They are not personally liable. This is because, a corporation is a separate legal entity. Thus, the corporation is liable to settle all its debts and obligations from the assets available in the corporation. Hence, this option is incorrect.
- Option (d) None are disadvanatages: As explained above, since double taxation is the disadvanatage of the corporation out of the given four options, this option is incorrect.
Hence, the correct answer is option (b).
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Chapter 13 Solutions
EP HORNGREN'S FINAN.+MGRL.ACCT.-ACCESS
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- Business/Professional Ethics Directors/Executives...AccountingISBN:9781337485913Author:BROOKSPublisher:Cengage