Definition: A C-corporation is a fictitious legal entity that is created to run a business by common ownership. In other words, one or more people get together and create a C-corporation by creating ownership shares. The corporation itself is nothing more than a legal entity. The corporation can own assets and have liabilities separate from its owners– the shareholders. This is one of the great advantages C-corporations have over Sole proprietorships and Partnerships. The C-corporation’s liabilities cannot pass onto the owners.
What Does C-Corporation Mean?
This is the main reason why business owners decide to incorporate. The C-corporation provides limited liability protection. The reason I refer to this as “limited liability” instead of unlimited liability is because the owners are always liable for their investment in the corporation. If the corporation goes bankrupt, the owners will lose the money they paid for their shares. Here’s an example of the advantages of a C-corporation.
For example, Joe owns 100% of Green Guitar, Inc. Green Guitar, Inc. owes the bank $1,000,000 on the mortgage of the business property. If Green Guitar, Inc. goes bankrupt, the bank cannot come after Joe for the mortgage. This would be different if Green Guitar was a partnership or sole proprietorship. The only thing Joe would lose is his investment in Green Guitar, Inc.
The downside of corporations is that they require much more legal formality than sole proprietorships and partnerships. C-corporations must have a board of directors and officers in addition to the shareholders. The shareholders themselves do not run a corporation. They simply vote, according to their ownership share, for the board of directors, which elects the corporate officers. The officers and board of directors “run” the company.