If George has invested $300,000 in a privately held stock. If the corporation does not do...

If George has invested $300,000 in a privately held stock. If the corporation does not do well and must declare bankruptcy. What amount does Thomas stand to lose?

		Up to his total investment of $300,000.
		Zero.
		$300,000 plus any personal assets the creditors demand.
		$150,000

Solutions

Expert Solution

The answer is Option A - George will stand to lose up to his total investment of $300,000

Explanation:

The reason for the above answer is that private companies have a distinct characteristic of limited liability, that is any owner (shareholder/ stockholder) of the company shall be made liable in case of bankruptcy only up to the extent of the amount he has subscribed to or guaranteed to pay. Unlike a partnership or sole proprietorship, the liability here is limited. Thus, even in case of bankruptcy or failure of the company, neither the company nor the creditors can demand any money from George for their dues.

However, the investment made by George will not recoverable either by selling or through surrendering the share to the company in the event of bankruptcy. Thus, this amount will be the maximum loss in case of bankruptcy.

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