Introductory Business Law CLEP Prep Practice Exam

What is the primary advantage of forming a corporation?

1. Personal liability protection

2. Tax advantages

3. Ability to raise capital

4. Ease of dissolution

The correct answer is: Personal liability protection

Forming a corporation offers many advantages, such as personal liability protection, tax advantages, ability to raise capital, and ease of dissolution. However, the primary advantage of forming a corporation is personal liability protection, which means that the shareholders are not personally responsible for the debts and obligations of the corporation. This shields the owners' personal assets from being used to satisfy the company's debts, providing a layer of legal protection. While the other options may also offer benefits, they are not the main reason for forming a corporation. Tax advantages, for example, may vary depending on the specific circumstances of the corporation and its owners, and the ability to raise capital and ease of dissolution can also be achieved through other business structures. Therefore, personal liability protection is the primary advantage of forming a corporation.