In forming a corporation, prospective shareholders exchange money, property, or labor (sweat equity)—or some combination of those assets—for the corporation's stock (shares of ownership). A corporation generally takes the same deductions as a sole proprietorship to figure its taxable income. A corporation can also take special deductions. A corporation conducts business, realizes net income or loss, pays taxes, and distributes profits to shareholders.

For federal income tax purposes, a C corporation is recognized as a separate taxpaying entity—separate from the shareholders. The profit of a C corporation is taxed to the corporation when earned, and then is taxed to the shareholders when distributed as dividends. This creates a double tax. The corporation does not get a tax deduction when it distributes dividends to shareholders. Shareholders cannot deduct any loss of the corporation.
In contrast, an S corporation is known as a flow-through entity, as it does not pay income taxes. Instead, all income flows through to the shareholders based on their proportional ownership, who pay income tax on the corporation’s income. The shareholders of both C corporations and S corporations are not personally liable for the debts and other obligations of the corporation.

In Pennsylvania (PA), forming a corporation involves prospective shareholders exchanging assets such as money, property, or labor for shares of ownership in the corporation. The corporation is then able to deduct certain expenses similar to a sole proprietorship, along with special deductions, to determine its taxable income. For federal tax purposes, a C corporation is taxed separately from its shareholders, leading to a double taxation scenario where the corporation's profits are taxed at the corporate level and again at the shareholder level when distributed as dividends. Unlike C corporations, S corporations in PA are considered pass-through entities, meaning they do not pay income tax at the corporate level. Instead, the income is passed through to the shareholders who then report it on their personal tax returns and pay the necessary taxes. Shareholders of both C and S corporations enjoy limited liability, meaning they are not personally responsible for the corporation's debts or other obligations.