Future Business Leader Achievments (FBLA) Economics Practice Exam

What is a notable disadvantage of corporations in terms of owner liability?

1. High personal liability of owners

2. Limited access to capital

3. Higher taxation on profits

4. Inflexibility in management structure

The correct answer is: High personal liability of owners

The notion that corporations offer a notable advantage is rooted in the principle of limited liability. In a corporation, the owners, or shareholders, are typically only financially liable for the debts and obligations of the corporation to the extent of their investment in the company. This means that their personal assets are generally protected from being used to satisfy corporate debts. Hence, personal liability of owners is not a disadvantage in the case of corporations; rather, it is a key benefit that differentiates corporations from other business structures, such as partnerships or sole proprietorships, where owners can be fully liable for business debts. The incorrect options further document why they are less relevant as disadvantages concerning owner liability. Limited access to capital, for instance, is generally not true for corporations since they can raise funds through the sale of stocks and bonds. Higher taxation on profits indicates a potential disadvantage of corporate structure but does not directly relate to owner liability. Inflexibility in management structure pertains to internal governance and can limit the pace of decision-making but does not impact the liability of owners in the same way as the concept of personal liability does. Thus, the awareness of owner liability highlights the protective nature afforded to shareholders in a corporate setting, making this characteristic a distinct advantage rather than a disadvantage.