Cor­po­ra­tions take more effort to set up than sole pro­pri­etor­ships. You must file papers with the state of Alaska to bring it to life. The state then gives you a cer­tifi­cate of incor­po­ra­tion which is like your corporation’s birth cer­tifi­cate. The cor­po­ra­tion is con­sid­ered a sep­a­rate per­son so long as you fol­low a num­ber of cor­po­rate for­mal­i­ties to keep it alive.

As a sep­a­rate per­son, the cor­po­ra­tion may enter into con­tracts, own prop­erty, be sued, and do busi­ness. This means that your per­sonal assets such as your home, sav­ings, cars, etc. are pro­tected from the acts of the cor­po­ra­tion so long as you fol­low the for­mal­i­ties to keep it alive.

But the big down­sides of cor­po­ra­tions are: dou­ble tax­a­tion (the cor­po­rate tax and your indi­vid­ual tax—although the tax to the cor­po­ra­tion is often zeroed out); less pro­tec­tion from cred­i­tors than an LLC; dou­ble tax­a­tion when you sell the busi­ness; and, the bur­den of keep­ing up with cor­po­rate formalities.

Should you set up a cor­po­ra­tion? Let’s just make this easy. Gen­er­ally if you expect to go pub­lic, you’ll prob­a­bly need a cor­po­ra­tion. You’ll also want to check with your CPA to see if some of the cor­po­rate tax advan­tages apply to you such as retained earn­ings, tax-favored fringe ben­e­fits, and fewer restric­tions for claim­ing losses. But most of these ben­e­fits apply to larger and very prof­itable com­pa­nies, so if you’re just start­ing up, a cor­po­ra­tion doesn’t make much sense. Which brings us to LLCs.