Texas Real Estate Brokerage Sales Apprentice Education (SAE) Practice Exam

C and S Corporations provide which type of protection?

1. Asset Protection

2. Personal Guarantees

3. Liability Protection

4. Financial Security

The correct answer is: Liability Protection

C and S Corporations primarily offer liability protection to their owners, which is a significant advantage of operating under these corporate structures. Liability protection means that the personal assets of the shareholders are typically protected from the debts and liabilities of the corporation. If the corporation faces lawsuits or files for bankruptcy, the shareholders’ personal assets, such as their homes and personal bank accounts, are usually not at risk. This protection is fundamental in encouraging entrepreneurship, as it allows individuals to take business risks without risking their personal wealth. Shareholders are only financially liable up to their investment in the corporation, which underscores the importance of forming such entities for business operations. While asset protection and financial security are certainly considerations in business structuring, the definitive and legally recognized advantage that C and S Corporations provide relates to liability protection. Personal guarantees, on the other hand, arise in different contexts, often when securing loans or acquiring credit, and do not relate directly to the protective benefits of these corporate forms.