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 Utah, 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 to determine its taxable income, similar to a sole proprietorship, but it also qualifies for special deductions. For federal tax purposes, a C corporation is taxed separately from its shareholders, leading to double taxation: once when the corporation earns the profit, and again when dividends are distributed to shareholders. Dividends do not provide a tax deduction for the corporation, and shareholders cannot deduct the corporation's losses. On the other hand, an S corporation is a pass-through entity, meaning it does not pay income taxes at the corporate level. Instead, income is passed through to 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 and obligations.