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Forming corporations helped entrepreneurs raise capital because investors in a corporation (shareholders or stockholders) can never lose more money than their initial investment, while investors in a partnership, the other traditional form of business organization, are partners in the partnership and are liable (legally responsible for paying) all of the debts of the partnership if it loses money. Obviously investing in a corporation is much less risky so people were more willing to invest money in it.

The larger and more ambitious a business, the greater the risk of its losing money, so for major business ventures such as building a railroad, it was essential that investors be able to limit their liability.

In the second half of the 20th century, new forms of business organizations were created, limited partnerships and limited liability companies, that give investors the benefit of limited liability, but up until then, a corporation was the only form of business organization that provided this protection for investors.

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10y ago

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