Part 1Smith's Shoes is a failed business enterprise, with debts of $10 million. Steve Smith has an ownership stake in Smith's shoes. Which of the following statements INCORRECTLY characterizes Steve Smith's legal liability for the debts of Smith's Shoes, depending on the firm's type of business organization? Part 1
A. If Smith's Shoes is a corporation in which Steve Smith is a stockholder, then Steve Smith does not need to use any of his wealth to pay the debt because the company has limited liability. B. If Steve Smith is a partner in Smith's Shoes, then his legal liability for the debts of Smith Shoes is $10 million divided by the number of partners. C. If Smith's Shoes is a proprietorship, then Steve Smith is fully liable for the entire $10 million in debt of the failed shoe store. D. None of the above statements is incorrect.

Question

Part 1​Smith's Shoes is a failed business​ enterprise, with debts of​ $10 million. Steve Smith has an ownership stake in​ Smith's shoes. Which of the following statements INCORRECTLY characterizes Steve​ Smith's legal liability for the debts of​ Smith's Shoes, depending on the​ firm's type of business​ organization? Part 1
A. If​ Smith's Shoes is a corporation in which Steve Smith is a​ stockholder, then Steve Smith does not need to use any of his wealth to pay the debt because the company has limited liability. B. If Steve Smith is a partner in​ Smith's Shoes, then his legal liability for the debts of Smith Shoes is​ $10 million divided by the number of partners. C. If​ Smith's Shoes is a​ proprietorship, then Steve Smith is fully liable for the entire​ $10 million in debt of the failed shoe store. D. None of the above statements is incorrect.

BlackTom AI · Accepted Answer

Let's restate the scenario and evaluate each statement carefully.
Option A: "If Smith's Shoes is a corporation in which Steve Smith is a stockholder, then Steve Smith does not need to use any of his wealth to pay the debt because the company has limited liability." This is correct in general: corporations provide limited liability to shareholders, meaning shareholders are not personally liable for the corporation's debts beyond their investment.
Option B: "If Steve Smith is a partner in Smith's Shoes, then his legal liability for the debts of Smith Shoes is $10 million divided by the number of partners." This is incorrect. In a general partnership, partners have joint and several liability for the partnership's debts. That means each partner can be personally responsible for the full amount, not just a prorated share based on the number of partners. The idea that liability splits evenly among partners is a misconception and does not reflect the typical legal framework of general partnerships.
Option C: "If Smith's Shoes is a proprietorship, then Steve Smith is fully liable for the entire $10 million in debt of the failed shoe store." This is correct. In a sole proprietorship, the owner has unlimited personal liability for all debts of the business, so Steve Smith could be personally on the hook for the full amount.
Option D: "None of the above statements is incorrect." Given that Option B is an incorrect characterization, this statement is itself incorrect because there is at least one incorrect statement among A–C.
In summary, A and C accurately describe the liability framework for corporations and sole proprietorships, respectively, while B misstates the liability of a partner in a partnership, and D incorrectly asserts that all statements are correct. The core misconception in B lies in how liability operates in partnerships (joint and several liability) rather than a fixed division by number of partners.

Homework:ch10_qz2

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