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Understanding the Small-Business Corporation: Legal Insights and Benefits
Definition & Meaning
A small-business corporation is a specific type of corporation that meets certain criteria set by the Internal Revenue Code. Primarily, it must have no more than 75 shareholders. This corporation can elect to be treated as an S corporation, allowing profits and losses to pass through to shareholders and be reported on their individual tax returns. Additionally, a small-business corporation can receive up to $1,000,000 in contributions for stock as capital and paid-in surplus, which enables shareholders to claim an ordinary loss if the stock becomes worthless.
Table of content
Legal Use & context
Small-business corporations are commonly used in various legal and business contexts. They are often favored by small business owners who want the benefits of limited liability while avoiding double taxation on corporate income. Legal areas that may involve small-business corporations include taxation, corporate governance, and securities law. Users can manage the formation and compliance of these corporations using legal templates from US Legal Forms, which are created by qualified attorneys.
Key legal elements
Real-world examples
Here are a couple of examples of abatement:
Example 1: A group of friends starts a tech company and decides to form a small-business corporation. They elect S corporation status to avoid double taxation on their profits.
Example 2: A family-owned restaurant forms a small-business corporation, allowing them to raise funds while providing limited liability protection to the owners. (hypothetical example)
Relevant laws & statutes
The key statutes governing small-business corporations include:
Internal Revenue Code, Section 1361: Defines small-business corporations and their eligibility for S corporation status.
Internal Revenue Code, Section 1244: Allows shareholders to claim ordinary losses on worthless stock under certain conditions.
State-by-state differences
State
Key Differences
California
Has specific filing requirements and fees for S corporations.
Texas
No state income tax, which can benefit small-business corporations.
New York
Requires additional state-level taxation on S corporations.
This is not a complete list. State laws vary, and users should consult local rules for specific guidance.
Comparison with related terms
Term
Definition
Key Differences
Corporation
A legal entity separate from its owners.
Can have unlimited shareholders and multiple classes of stock.
S Corporation
A corporation that meets specific IRS criteria for taxation.
Limits on shareholders and types of shareholders apply.
C Corporation
A standard corporation subject to double taxation.
Does not have the pass-through taxation benefits of an S corporation.
Common misunderstandings
What to do if this term applies to you
If you are considering forming a small-business corporation, start by consulting with a legal professional to understand the requirements and implications. You can also explore US Legal Forms for templates that can help you with the formation and compliance processes. If your situation is complex, seeking professional legal advice is highly recommended.
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