Which of the following statements is CORRECT? Answer If a corporation elects to be taxed as an S corporation, then both it and its stockholders can avoid all Federal taxes. This provision was put into the Federal Tax Code in order to encourage the formation of small businesses. The more capital a firm is likely to require, the smaller the probability that it will be organized as a corporation. It is generally easier to transfer one's ownership interest in a partnership than in a corporation. One danger of starting a proprietorship is that you may be exposed to personal liability if the business goes bankrupt. This problem would be avoided if you formed a corporation to operate the business. Corporate shareholders are exposed to unlimited liability, but this factor is offset by the tax advantages of incorporation