This paper provides a theory of incorporation and taxation that emphasizes the role of the corporate legal form in facilitating access to external capital and the potential advantages of limited liability. Incorporation relaxes financing constraints and makes corporations larger than comparable...

Corporate income is taxed twice, once at the entity level and then taxed once again at the shareholder level. In addition, the corporate tax system favors debt over equity financing of capital expenditures; corporations are able to deduct interest on borrowed funds, unlike the return to equity....