Question

which of the following statements is correct?
corporations are taxed more favorably than proprietorships.
corporations have unlimited liability.
because of their size, large corporations face fewer regulations than smaller corporations and proprietorships.
reducing the threat of corporate takeover increases the likelihood that managers will act in shareholders interests.
bond covenants are designed to protect bondholders and to reduce potential conflicts between stockholders and bondholders.

Explanation:

1. Corporations are generally taxed less favorably as they face double - taxation (corporate income tax and then shareholders' tax on dividends), while proprietorships are taxed as pass - through entities.
2. Corporations have limited liability, not unlimited.
3. Larger corporations usually face more regulations due to their greater economic impact.
4. Reducing the threat of corporate takeover may reduce managers' incentives to act in shareholders' interests as they face less market discipline.
5. Bond covenants are indeed designed to protect bondholders and mitigate conflicts between stockholders and bondholders by setting restrictions on the firm's actions.

Answer:

E. Bond covenants are designed to protect bondholders and to reduce potential conflicts between stockholders and bondholders.