Which statement accurately describes the nature of a corporation?

• A. It is owned only by employees.
• B. It is legally separate and distinct from its owners.
• C. It cannot distribute profits.
• D. It is always small.

Answer: (B)

A corporation is a separate legal entity from its owners. This means the company can own assets, incur debts, enter contracts, sue or be sued in its own name, and continue to exist regardless of changes in ownership. Stockholders own the company, but they don’t have to be involved in daily operations, and their liability is typically limited to their investment. This separation between the entity and its owners is what allows profits to be distributed to shareholders as dividends, or reinvested in the business.

The other statements don’t fit. It isn’t owned only by employees—ownership can be held by outsiders, and many corporations have shareholders who aren’t employees. Corporations can distribute profits (through dividends or other means), so saying they cannot distribute profits isn’t accurate. And corporations vary widely in size; they are not necessarily small.