California Real Estate Practice Exam

Which business structure leaves personal assets of principals available to creditors for satisfaction?

1. Corporation

2. Limited Partnership

3. Partnership

4. None of the above

The correct answer is: Corporation

The answer is the option that indicates a business structure where personal assets of principals are at risk for satisfying business debts. In California and elsewhere, a corporation is recognized as a separate legal entity. This means that, generally speaking, the corporation itself is responsible for its debts and liabilities. However, in circumstances where individuals acting on behalf of the corporation engage in fraudulent activities or fail to follow corporate formalities, personal assets may become vulnerable, especially if the corporate veil is pierced. On the other hand, both a Limited Partnership and a general Partnership can expose the general partners to liabilities, as their personal assets can be targeted by creditors of the business. In a Limited Partnership, only the general partners have personal liability, while limited partners are only liable up to the amount of their investment in the partnership. Choosing the corporation as the answer might stem from a misunderstanding of the level of personal asset protection typically afforded by this structure; it is in fact intended to protect personal assets under normal circumstances, making it a misleading choice in this context. Understanding the nuances of liability across various business structures is crucial for making informed decisions in real estate and business operations.