Question

Cheers Inc. operates as a partnership. Now the partners have decided to convert the business into a regular corporation. Which of the following statements is CORRECT? a. Cheers will now be subject to fewer regulations. b. Cheers' shareholders (the ex-partners) will now be exposed to less liability. c. Cheers' investors will be exposed to less liability, but they will find it more difficult to transfer their ownership. d. Assuming Cheers is profitable, less of its income will be subject to federal income taxes. e. Cheers will find it more difficult to raise additional capital.

Answer 1

Answer: The correct answer is "b. Cheers' shareholders (the ex-partners) will now be exposed to less liability.".

Explanation: The statement "b. Cheers' shareholders (the ex-partners) will now be exposed to less liability." is CORRECT because former partners (when the company operated as a company) now become shareholders (because the company functions as a regular corporation) and they are exposed to less liability in situations where the corporation is a debtor.