Future Business Leaders of America (FBLA) Agribusiness Practice Test

What defines a corporation as a legal entity?

1. It is solely owned by a single individual

2. It is created by a specific mission and objectives

3. It exists separately from its shareholders and can engage in contracts

4. It is subject to no regulations or laws

The correct answer is: It exists separately from its shareholders and can engage in contracts

A corporation is defined as a legal entity primarily because it exists separately from its shareholders and has the ability to engage in contracts, own property, and incur liabilities in its own name. This separation provides limited liability protection to its shareholders, meaning they are typically not personally responsible for the debts and obligations of the corporation. Thus, if a corporation fails or faces legal issues, the financial risk to individual shareholders is limited to their investment in the corporation. This characteristic is foundational to the concept of a corporation, distinguishing it from other business structures such as sole proprietorships or partnerships, where the owners may be personally liable for business debts. The ability of a corporation to function independently also allows it to raise capital more effectively through the sale of stock and to continue existing beyond the life of its owners. This permanence and separation is a fundamental reason why corporations are a popular choice for many businesses seeking to limit liability and enhance their ability to grow.