The rules governing the corporation and its formation are controlled by the law of the state where the corporation is established. Once a corporation is formed, a distinct entity exists that is separate from the shareholders who own it, and this entity does not automatically dissolve upon the death of its owners. The corporation can conduct business, make purchases, pay its own taxes, sue or be sued, and enter into contracts. A closely held corporation is typically owned by a small number of shareholders who actively assist in the management and running of the business. A publicly held corporation is generally owned by thousands of investors who are not involved in the running of the business.
Corporations can take several forms for tax and other purposes.
A C Corporation first pays a tax on its net taxable income. If it distributes profits in the form of dividends to its shareholders, they must also pay a tax on this distribution. An S Corporation does not pay any tax on its net profits. All income and deductions are passed directly through to the shareholders, who pay tax on their proportional share of the profits. Unlike in a C Corporation, however, S Corporation shareholders are personally liable for any losses.