Question

Which of the following statements is true of a corporation?

A) The liabilities of the corporation can be paid by the personal assets of the shareholders.

B) Shares of stock cannot be readily bought and sold by investors on the open market.

C) Shareholders are authorized to sign contracts or make business commitments on behalf of the corporation.

D) Corporations pay income tax on corporate earnings, and shareholders pay personal income tax on corporate dividends and gains from sale of stock

Answer 1

Analysis of the options:

A) Shareholders are only liable for the amount they have invested in the stocks of the corporation. Their personal assets cannot be used to settle the liabilities of the corporation. Hence, this is not the correct answer.

B) Shares of stock can be readily traded i.e. bought and sold by investors on the open market like the stock markets. Hence, this is not the correct answer.

C) Shareholders cannot sign contracts or make business commitments on behalf of the corporation since only the management/board can do the same. Hence, it is not the correct answer.

D) Corporations are liable to pay income taxes on the corporate earnings and the shareholders are liable to pay personal income taxes on the corporate dividends which they receive and the gains that arises to them from the sale of stock.

Hence, option D is the correct answer.