General Education Development (GED) Practice Exam

Which statement is true regarding a corporation?

1. It is always owned by shareholders

2. Its shareholders are personally liable if it fails

3. Its board of directors is personally liable if it fails

4. It cannot sue another entity or be sued

The correct answer is: It is always owned by shareholders

A corporation is a distinct legal entity that is typically owned by its shareholders, who invest in the corporation by purchasing shares. This ownership structure means that shareholders can benefit from the company's profits through dividends and have a say in certain corporate decisions, usually exercised at annual meetings. The key defining feature of corporations is that they exist independently of their owners, which is why ownership is often characterized by shares held by shareholders. In contrast to this, the other statements do not accurately reflect the nature of corporations. If we consider the implications of a corporation's structure, shareholders generally enjoy limited liability protection, which means they are not personally responsible for the corporation's debts or liabilities if the corporation fails. This limited liability is a fundamental advantage of forming a corporation. Similarly, while the board of directors governs the corporation, they also benefit from this limited liability, as they are not personally liable for the company’s financial obligations or legal challenges. Lastly, unlike individuals, corporations have the legal capacity to sue and be sued, allowing them to engage in legal contracts and proceedings just like any other entity. In summary, the correct statement underscores the ownership aspect of corporations and highlights their unique legal status, which protects shareholders from personal liability, while allowing them to participate in the corporation's governance