Q1SE_1 - Horngren'S Financial And Managerial Accounting

Question

Question - Describing corporation characteristics

Due to recent beef recalls, Southwest Steakhouse is considering incorporating. Bob, the owner, wants to protect his personal assets in the event the restaurant is sued.

Requirements

1. Which advantage of incorporating is most applicable? What are other advantages of organizing as a corporate entity?

Step-by-Step Solution

Answer

Answer

The company is considered as separate legal entity and have a perpetual succession. It does not allow its stockholders to be bonded by any contract and they have limited liability.

Step 1: Basic introduction-

Corporate entity: Entity structure established with the purpose of running a business and hold assets on the name of company and includes shareholder, directors, investors, and other stakeholders is known as corporate entity.

Step 2: Most applicable advantage of incorporating and other advantages-

It does not permit stockholders to tie the business to an agreement.

There exists limited liability for stockholders.

The corporation has continuous life.

No mutual agency is found between the stockholders and the corporation.