Corporations are one of the oldest and most traditional business entity forms. The basic premise of a corporation is that the business owners and the business itself are separate legal entities. This business form is attractive because corporations can (a) sell shares to obtain investment capital without giving up managerial control; (b) exist on their own, perpetually (meaning they do not dissolve automatically when major stakeholders die or go bankrupt); and (c) protect the business owners (shareholders) from personal liability beyond their investment in the business.

Corporations must be formed and operated in compliance with state law. This means registering the corporation with the state and making necessary periodic filings and paying fees to the state, not mingling the assets of the corporation and its owners, and complying with other state-specific rules. It's really not as difficult as it sounds, as most states have made it relatively easy to incorporate. Usually it is simply a matter of choosing a name, filling out a form, and paying a filing fee to the Secretary of State. No lawyer is required, nor do you need a license, assuming you will not be doing business in a regulated industry, such as a banking or insurance.

The trick, however, is sticking to the rules. Generally speaking, if a business owner follows proper corporate formalities and adheres to the laws of the state in which the corporation operates, she will not be held personally liable for the monetary and legal claims against the corporation. (Note that the business owner can still be held personally liable for his own misconduct, failing to fund the corporation with enough money to reasonably cover its liabilities, failing to keep the corporation's business separate from the owner's personal business, and a number of other reasons.) This general protection of the business owner from personal liability is one of the major advantages of choosing a corporate form. But as with most good things in life, this protection is taxed.

One of the major drawbacks of choosing the corporate form is the problem of double taxation. Because the corporation and the business owner(s) are separate entities, the corporation pays its own income taxes. When the corporation then distributes money to its owners, the owners then pays taxes on that income. The end result is that every dollar a customer pays is taxed twice before it reaches the business owner(s) hands.