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 Maine, as in other states, forming a corporation involves prospective shareholders exchanging assets such as money, property, or labor for the corporation's stock. The corporation is then able to deduct certain expenses similar to a sole proprietorship when calculating its taxable income, in addition to special deductions available to corporations. Federally, a C corporation is taxed separately from its shareholders, leading to double taxation: once at the corporate level on earnings, and again at the shareholder level on dividends. Shareholders cannot deduct corporate losses on their personal tax returns. Conversely, an S corporation is a pass-through entity, meaning it does not pay federal income taxes at the corporate level. Instead, its income is passed through to shareholders who then report it on their personal tax returns and pay any tax due. In both C and S corporations, shareholders enjoy limited liability, meaning they are not personally responsible for the corporation's debts or other obligations.