You paid $500,000 for these shares 5 years ago. The corporation has 3 other shareholders each...

You paid $500,000 for these shares 5 years ago. The corporation has 3 other shareholders each with a 25% equity position in the company. The corporation has grown over the past 4 years and your shares are now worth $1,000,000. The corporation recently issued bonds in the amount of $4,000,000 to fund an acquisition. The acquisition was a disaster and the company is now unable to meet its interest commitments and is on the verge of bankruptcy. There are no other debts. As a 25% shareholder, what is the maximum potential loss you could have if the company declares bankruptcy? Explain. How would your answer change if the company was a general partnership instead?

Expert Solution

The benefit of limited company is that the liability of shareholders are limited. It means if company goes bankrupt, they cannot be held personally liable for the debts of the company. They can be held liable to pay only the amount if any unpaid on shares held by them.

Therefore in the given case, if the company declares bankrupt, the maximum potential loss as a 25 % shareholders is that the amount earlier contributed to acquire the shares of company which was further increased by $ 500000 due to good performance of company may become worthless. But they will not be personal liable to pay debts of the company, if corporate assets are unable to pay.

But in case of General Partnership, the liability of partners are unlimited. They are jointly and severally liability and if assets of partnership firms are unable to pay off the debts, then the personal assets of partners will also be liable to pay debts.

jeff jeffy answered 2 years ago

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