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Corporations differ from sole proprietorships primarily in the concept of liability, with corporations providing limited liability protection to their owners, known as shareholders. When a corporation is formed, it creates a separate legal entity that stands apart from its owners. As a result, shareholders are only liable for the debts and obligations of the corporation up to the amount they have invested in the company. This means that personal assets of shareholders are typically protected from creditors in the event that the corporation faces financial difficulties or lawsuits.
On the other hand, sole proprietorships do not offer this same level of liability protection. Owners of sole proprietorships are personally liable for all debts and obligations incurred by their business. This means that if the business incurs debts or faces legal action, creditors can pursue the owner's personal assets.
The concept of limited liability in corporations encourages investment and entrepreneurship, as individuals can invest in the company without the fear of losing more than their initial investment. This fundamental difference in liability structure is key to understanding the appeal of forming a corporation compared to operating as a sole proprietorship.