Glossary of Business Terms

[ A ]


Acquisition

Obtaining control of another entity by purchasing all or a majority of its equity interests, or by purchasing its assets.

Administrative Dissolution

An involuntary dissolution of an entity by an act of the Secretary of State or similar state authority, caused by the company’s failure to comply with certain statutory requirements; especially the failure to file an annual report, to pay franchise taxes or maintain a valid Registered Agent.

Advisory Board of Directors

An advisory board of directors are individuals appointed to advise an elected board of directors. This board is not bound by the duties imposed upon elected board members, and the corporation is not required to follow their recommendations.

Agent

Anyone who is authorized to act on the behalf of another. A corporation acts only through its agents; therefore, it is important to define what actions an agent is authorized to perform.

Agent for Service of Process

An agent, required to be appointed by a corporation, whose authority is limited to receiving process issued against the corporation. Also known as a Registered Agent or a Resident Agent.

Alter Ego

A doctrine of law which disregards the principle of limited liability enjoyed by a corporate entity when it is proven that, in fact, no separate identity of the individual and corporation exists. The alter ego principle may also apply to relationships between corporate entities and their subsidiaries.

Alternative Tax (Assumed Capital) Method

An alternative method for calculating Delaware franchise taxes for Corporations with par value stock less than $100 (cannot be used if stock has no par value). Alternative Tax is determined by dividing corporation’s gross assets by all issued shares and then multiplying this number (quotient) or the actual par value, whichever is greater, by the authorized shares. Divide this figure by $1,000,000, and then multiply by $200 to get final tax due. Corporations are allowed to pay the lesser of Alternative Tax Method and Authorized Shares Method. Added to this figure is a $50 Annual Report Filing fee to make a minimum tax of $175. Maximum tax is $180,000.

Amended Certificate of Authority

A document issued by a state to a foreign entity evidencing that the entityhas amended its original certificate of authority.

Amendment

An addition to, deletion from, or a change of existing provisions of the certificate of incorporation, certificate of formation or similar document evidencing the formation of the entity.

Annual Meeting

A yearly meeting of shareholders at which directors are elected and other general business of the corporation is conducted.

Annual Report

A required annual filing in a state, usually listing directors, officers and financial information. Also, an annual statement of business and affairs furnished by a corporation to its shareholders.

Apostille

Official government authentication of a document, issued by the Secretary of State under the Hague Convention, which legalizes it for use in another country.

Application for Certificate of Authority

The form filed in many states to qualify a company to transact business in a state, other than its state of formation, as a foreign entity.

Arm’s Length Relationship

An arm’s length relationship is a term used to describe a type of business relationship a company should have with a close associate to avoid a conflict of interest. For example, when you negotiate with your banker or your supplier, any agreement which results will likely reflect market value and commercially reasonable terms and conditions. When you loan money to your son or daughter, you may be inclined to provide much more favorable terms and conditions. The first example would be considered to be an arm’s length relationship, while the second example would not. When your company does business with or makes loans to its officers, directors, members or managers the relationship must be at arm’s length to avoid conflicts of interest.

Articles of Incorporation

The title of the document filed with the Secretary of State to create a corporation. Also known as the certificate of incorporation or corporate charter.

Articles of Organization
The title of the document filed with the Secretary of State to register a limited liability company (LLC) with the state. Also known as a certificate of formation.

Asset

An object possessed or owned by an individual or entity that has value.

Asset Protection

A method by which an individual or entity protects their assets from creditors through the use of multiple entities, trusts, insurance, and estate planning.

Assumed Capital

The value of a Corporation’s shares determined by dividing its gross assets by all of its issued shares and then multiplying this number (quotient) or the actual par value, whichever is greater, by its authorized shares.

Assumed Name

A name other than the true name, under which a business organization conducts business. Also referred to as a fictitious name, a trade name or “doing business as” (d/b/a).

Authorized Person

A person acting pursuant to the LLC Act who has been directed by the members or manager to take certain actions. The LLC is formed by an Authorized Person, notwithstanding the fact that the company does not exist to authorize the action.

Authorized Shares

The maximum number of shares that a corporation may issue pursuant to its certificate of incorporation.

Authorized Shares Method

The standard method of calculating a Corporation’s franchise tax in Delaware. Determined by assigning a tax for a certain range of authorized shares. For instance, authorized shares of 3,000 or less result in a tax of $30. Added to this is the $20 Annual Report Filing fee to make a minimum tax due of $50. Maximum tax is $150,000.

[ B ]


Basis
Basis, a tax and accounting term, is the cost of the company’s assets, together with certain adjustments, against which gain or loss is measured. With stock, basis is what you pay for stock or the fair market value of property you contribute in exchange for the stock.

Beneficial Owners

Those with a true ownership interest or ultimate ownership interest in an entity, but not necessarily the persons whose name appears on the ownership records of the entity. In some cases the “legal” owner, whose name appears on the stock ownership ledger of other record of another entity may serve as a nominee for the true or beneficial owner.

Blue Sky Law

A term used to describe state laws and regulations governing the issuance and sale of securities to residents of a state and the licensing and regulation of securities brokers and dealers.

Board of Directors

The governing body of a corporation which is elected by shareholders. The directors are responsible for selecting the officers and the supervision and general control of the corporation. Under the DGCL the Board of Directors is entrusted with the responsibility to govern the operations of the corporation.

Bond

A long-term debt secured by a mortgage on real property or a lien on other fixed assets.

Business Corporation Act

A business corporation act is the collection of laws in each state that governs corporations. Delaware’s business corporation act is called the Delaware General Corporation Law (DGCL).

Bylaws

The regulations adopted by corporation which, subject to statutory law and the certificate of incorporation, provide the basic rules for the conduct of the corporation’s business and affairs.

[ C ]


C Corporation
The most common corporate tax structure. A C corporation may have an unlimited number of stockholders, whereas an S corporation is limited to 100 stockholders and is subject to other limitations to which a C corporation is not. Consequently, it is usually chosen by those companies planning to have more than 100 stockholders or large public company.

Cancellation

The certificate filed by a limited liability company to terminate its existence following its winding up and dissolution.

Capital Gains or Losses

Gains or losses that result when a capital asset, such as stock, is sold for more or less than its basis.

Capital Stock

Same as “Authorized Stock.” Sometimes expressed as the amount fixed by the charter to be subscribed for and paid in or secured to by paid into the corporation by its stockholders.

Certificate of Authority

Formal evidence of qualification issued by a state to a foreign entity.

Certificate of Existence

See Certificate of Good Standing

Certificate of Good Standing

A certificate issued by the Secretary of State as conclusive evidence that an entity validly exists in good standing and consequently is authorized to transact business in the state. The certificate generally sets forth the corporation’s name; that it is duly incorporated or authorized to transact business; that all fees, taxes and penalties owed the state have been paid; that its most recent annual report has been filed; and, that articles of dissolution have not been filed. Also known as a certificate of existence or certificate of authorization.

Certificate of Incorporation

The title of the document filed with the Secretary of State to create a corporation. Also known as the articles of incorporation or corporate charter.

Chancery Court

Specialized court in Delaware staffed by judges (called “Chancellors”) who are expert in business and commercial transactions. This court only handles business cases, and already has a hundred year tradition of precedents interpreting Delaware’s business laws.

Charter

Same as “Certificate of Incorporation.” Sometimes referred to as Charter because that was the name used by the earlier legislatures when only an act of the legislature could incorporate a business.

Close Corporation

A corporation that elects in its articles of incorporation to be registered under the close corporation statutes. The Close Corporation laws provide for a maximum number of shareholders. In addition, the Close Corporation law provides that the business of the corporation is governed by its stockholders and not the board of directors and relax the corporate formalities.

Closely Held Corporation

A closely held corporation is any corporation in which the stock is held by a relatively small group of people or entities. Stock of a closely held corporation is generally not publicly traded on any stock exchange.

Common Law Trust

A trust created pursuant to and governed by English Common Law precedents. Normally, a grantor of assets into a common law trust cannot maintain control over those assets without those assets still being considered a part of the grantor’s estate and subject to attachment.

Common Stock

A class of shares that has no special features and possesses no greater rights than any other shares.

Commingle

Commingling, is the sharing and pooling of personal and company assets. For example, rather than maintain separate company and personal bank accounts, you choose to use one account for personal and business purposes. In those cases where the owners of business entity commingle personal and business assets, those owners may become personally liable for company obligations.

Compliant

A level of completion of a legal entity’s responsibilities to maintain the formalities of legal existence under the laws of the jurisdiction in which it is formed. The term is not intended to mean or imply conformity with all of the federal and state regulatory or tax requirements which may exist for operating your business.

Common Shares

A class of shares that has no special features and possesses no greater rights than any other shares.

Consent Resolution

A consent resolution is any resolution signed by all of the directors or the number of shareholders/members/managers, which are necessary to authorize a particular action. This act eliminates the need for face-to-face meetings of directors, shareholders, members or managers as the case may be. Also a signed resolution of the members of a LLC.

Consideration

Consideration is the value given as the basis of a contract. Consideration includes any benefit conferred, or agreed to be conferred, upon the promisor, by any other person, to which the promisor is not lawfully entitled, or any prejudice suffers, or agreed to be suffered, by such person, other than such as he is at the time of the consent lawfully bound to suffer, as an inducement to the promissory.

Consolidation

The statutory combination of two or more entities to create a third and new entity.

Constituent

A party to a transaction; a party involved in a merger, consolidation or share exchange.

Contract

A private agreement entered into by two or more parties, and supported by valid consideration, wherein the parties agree to adhere to certain terms and conditions for an established period of time, or indefinitely.

Contract Creditors

Contract creditors are people or businesses which are owed money or property to because of a written or verbal contractual agreement. If you agree to buy 30 widgets from Widget World, Widget World becomes a contract creditor.

Contribution

Money, services rendered, or other thing of value paid to an entity in exchange for ownership in that entity.

Conversion

The act of transferring from one entity type to another, yet still preserving the original entity’s date of formation.

Convertible Security

A security that may be exchanged by the holder for another type of security.

Corporate Charter
See Articles of Incorporation.

Corporate Compliance

The act of maintaining proper corporate records and registered agent services, making timely franchise/LLC/LP tax payments, holding the entity out as a separate and distinct being, and not commingling personal assets with corporate assets.

Corporate Indicator

A word or an abbreviation of a word that must be included in a corporation’s name to indicate that the named entity is a corporation. Valid corporate indicators include: incorporated, corporation, limited, company, inc., corp., ltd. and co.

Corporate Record Book (or Corporate Kit)

A book or kit that organizes all of the key documents of the Company, such as the Certificate of Incorporation, Bylaws, Stock Certificates, Stock Transfer Ledger, Minutes, Resolutions, etc. Similar record books are available for LLC’s and LP’s.

Corporate Veil

A shield of limited liability afforded to Corporations, LLC’s and LP’s that maintain their company compliance. Creditors cannot proceed against owners’ personal assets in the absence of actual fraud or similar acts.

Corporation

An artificial entity created under and governed by the laws of the state of incorporation.

Corporation Law

The statutory provisions of a state relating to domestic and foreign corporations.

Correction

A certificate filed with the Secretary of State that corrects a clerical error in a previously filed document.

Court of Chancery

Same as “Chancery Court.”

Cumulative Preferred Stock

Preferred stock that provides the holders will receive cumulative dividends to the extent that the payment of one or more dividend payments have been omitted, as well as current dividends, prior to any dividends being paid to common stock holders.

Cumulative Voting

A procedure used for electing directors in which shareholders are entitled to multiply the number of votes they are entitled to based upon their stock holding by the number of directors for whom they are entitled to vote. The stockholder may cast the product for a single candidate or distribute the product among two or more candidates.

[ D ]


DBA
Doing business as; see Fictitious Name.

DGCL

The Delaware General Corporation Law, Title 8, Delaware Code, §101, et seq.

Debenture

A long-term debt issued mainly to evidence an unsecured corporate debt.

Debt Financing

A method of raising capital in which a corporation borrows money.

Delaware Corporate Law

The Delaware General Corporation Law (DGCL) and the decisions of the Delaware Court of Chancery established over the last 100 years which governs nearly every aspect of corporate governance and affairs of Delaware Corporations.

Delaware Court of Chancery Same as “Chancery Court.”

Delaware General Corporation Law (DGCL) See DGCL

Delaware Limited Liability Company Act (DLLCA)

The body of law governing the formation and operation of Delaware limited liability companies, Title 6, Delaware Code, §18-101.

Delaware Statutory Trust Act (DSTA)
The body of law that provides for the creation of a form of trusts which were formerly known as business trusts. Title 12 §3801, et seq. Statutory Trusts are not common law trusts. At least one trustee must be located in Delaware. The settlor or grantor can not only remain a beneficiary while still maintaining limited liability protection, but also can act as trustee or advisor to the trust.

Derivative Suit
A lawsuit brought by a shareholder/member/manager or partner on behalf of a company to protect the company from wrongs committed against it.

Directors
The individuals who, acting as a group known as the board of directors, manage the business and affairs of a corporation.

Dissenters Right
A right granted to shareholders that entitles them to have their shares appraised and purchased by the corporation if the corporation enters into certain transactions that the shareholders do not approve of. The LLC act provides for contractual appraisal rights if included in the Company Agreement

Dissolution
The statutory procedure that terminates the existence of an entity.

Distribution
A transfer of money or other property made by an entity to a shareholder/member/partner in respect of the entity’s ownership interests.

Dividend
A distribution of a corporation’s earnings to its shareholders.

Domestic Corporation
A Corporation that has incorporated in Delaware.

Domestication
The act of changing the home state of an entity from one jurisdiction to another, preserving the original date of formation.

Double Taxation
When a corporation must pay taxes on its earnings and individual shareholders must also pay taxes on any dividends that are distributed.

Duration
How long a business will be recognized as an entity. A company with a perpetual duration will last forever unless the state dissolves the company. A 30-year duration means that the company will automatically dissolve on it’s 30th anniversary of existence.

[ E ]


Electronic Signature
A mark, symbol, notation or signature in electronic form that is utilized to indicate one’s intent to be bound by that document.

Electronic Transmission
Any form of communication not in paper form that creates a record that can be retained, retrieved and reviewed by the recipient. Delaware allows voting by and notice to shareholders to be provided via electronic transmission.

Employer Identification Number (EIN)
The tax identification number provided by the Federal Government to each entity that applies. Same as “Federal Tax Identification Number”.

Employment Agreement
An employment agreement is a contract between a company as the employer and an individual as employee which defines the employment relationship between the parties. This agreement can be written or verbal; although all employment agreements should be in writing. Companies typically have employment agreements with key employees. The terms and conditions of an employment agreement must be consistent with state and local employment statutes as well as the company’s organizational documents and any existing shareholder or similar agreements.

Equity
An ownership interest in a corporation or LLC, evidenced by stock or membership interests.

Equity Financing
A method of raising capital in which a company issues shares of stock, membership interests or partnership interests, as applicable.

Equity Interest
An ownership interest; the interest of a shareholder, member or partner as distinguished from that of a creditor.

Estate Planning
The process of creating, while still alive, a mechanism for transferring assets for distribution to others upon one’s death. This mechanism also usually intends to minimize any tax burden normally imposed by such a transfer.

[F]


Family Limited Partnership

A limited partnership created by a family to help protect the family’s personal assets. Normally, the senior family members act as the general partners and place certain of the family assets, like the home or farm, into the FLP. The next generations are designated as the limited partners and contribute no assets to the FLP. Typically, senior family member owns a nominal interest in the FLP, and the next generation own the remaining 99%, usually in a trust.

Federal Income Tax
Taxation by the U.S. government of the income realized by individuals and entities during a given fiscal or calendar year.

Federal Tax Identification Number
Same as “Employer Identification Number.”

Fictitious Name
A name, other than the name of the entity as reflected on its certificate of formation, certificate of incorporation or certificate of limited partnership, under which a corporation or other business organization conducts business. Also referred to as an assumed name, a trade name or “doing business as” (d/b/a).

Fiduciary Relationship
A relationship in which one party (the fiduciary) must act in good faith and with due regard to the best interests of the other party or parties. Generally the duty breaks down as follows: · The duty of due care requires that persons act in a fully-informed manner and with the requisite level of care dictated by the particular circumstances. · The duty of loyalty requires that the person act unselfishly; the best interests of the company and its members must take precedence over any interest possessed by the applicable actor personally and not shared by the members generally.

Foreign Corporation
A term applied to a corporation doing business in a state other than its state of incorporation.

Forfeiture
The act by which the Attorney General or the Chancery Court terminates the charter of an entity due to the entity’s abuse, misuse or nonuse of its company powers.

Formation
The act of organizing a limited liability company.

Fractional Share
Ownership in a corporation in an amount less than a full share.

Franchise Tax
A tax or fee levied annually upon a corporation, limited liability company or similar business entity for the right to exist or do business in a particular state. Failure to pay the franchise tax or similar fees results in the company not being in “good standing” and after the passage of time the administrative dissolution of the company and forfeiture of the charter.

[ G ]


General Partner
The partner in a limited partnership or general partnership that manages the daily business operations of the partnership. The General Partner is responsible for the obligations and debts of the partnership. A general partner may be an individual or an entity. The sole general partner and the sole limited partner may not be the same person.

Going Public
The process by which a corporation first sells its shares to the public.

Good Standing

An entity is said to be in good standing when it has paid its franchise fee, made any required reports and paid all other fees required by the laws and regulations of the jurisdiction under which it operates.

Governing Instrument

The private agreement created by a grantor of a trust that governs the operations of the trust and the rights and responsibilities of the trustees and beneficiaries.

Gross Assets

The sum total of all assets of an entity, before deducting any debts, obligations, expenses or taxes. For use in determining the Delaware Franchise Tax, Gross Assets are the assets reported on the Corporation’s most recent federal corporate income tax return, Form 1120.

[ H ]


Hague Convention
Established October 5, 1961, abolished the requirement of legalization for foreign public documents, and established a basic certification of public documents, outside their country of origination. Member countries have adopted a standard form for the authenticity of public documents, called an Apostille.

Holding Company

A corporation whose sole purpose is to holding intangible assets such as the stock in other companies, patents, licenses or trademarks and manage these companies’ intangable assets. Delaware does not tax the income of Holding Companies which meet the requirements to Title 30, Delaware Code.

Home State

The State in which an entity is formed.

Hostile Takeover

A change of control of an entity that occurs without the approval of the target company’s management.

[ I ]


Incorporation
The act of creating or organizing a corporation under the laws of a specific jurisdiction.

Incorporator

The person(s) who perform the act of incorporation and who sign the certificate of incorporation and deliver them for filing.

Indemnification

Financial protection provided by a company to its directors, officers, employees, members, managers or partners against expenses and liabilities incurred by them in lawsuits alleging that they breached some duty in their service to or on behalf of the company or serving in a capacity in another entity at the request of the company.

Involuntary Dissolution

The termination of a company’s legal existence pursuant to an administrative or judicial proceeding; dissolution forced upon a company rather than decided upon by the company.

IRS Form 1023

A form required by IRS to receive tax-exempt status.

IRS Form 1040

A form required by IRS to file annual income tax return for individuals.

IRS Form 1065

A form required by IRS to file annual income tax return for partnerships.

IRS Form 2553

A form required by IRS to elect Subchapter S tax status for a general or close corporation.

IRS Form SS-4

A form required by IRS to apply for a Federal Tax Identification Number.

Issued Shares

Those common and preferred shares that a Corporation has issued to its shareholders and for which it has received consideration.

ITIN

Individual Taxpayer Identification Number. Now required for a foreign individual before their company can obtain an EIN (Employer Identification Number).

[ J ]


Judicial Dissolution
Involuntary dissolution of an entity by a court at the request of the state attorney general, a shareholder/member/manager or partner or a creditor.

Jurat

Certificate of officer or person before whom writing was sworn to. A notarial certificate.

[ L ]


Legalization of Certified Documents
The process of certifying public documents of an entity for use in a country that is not part of the Hague Convention.

Limited Liability

The liability of an owner of a Corporation, LLC, Partnership or Statutory Trust for the business debts of the entity is limited to the owner’s investment in the entity. Owners’ personal assets are protected.

Limited Liability Company (LLC)

An artificial entity created under and governed by the laws of the jurisdiction in which it was formed. Limited liability companies are generally able to provide the same limited personal liability as found in a stockholder of corporations and with the same passthrough taxation of partnerships or S Corporations.

Limited Liability Limited Partnership

A provision of the LP Act under which the general partners of the limited partnership are afforded limited liability protection, in addition to the limited partners.

Limited Liability Partnership

A general partnership that provides that its partners are not liable for the debts and other obligations of the partnership solely by virtue of being a partner. Normally used by professional firms.

Limited Partner

A partner in an LP or LLLP who by law may not participate in the management of the partnership. The limited partners have limited liability.

Limited Partnership

A statutory form of partnership consisting of one or more general partners who manage the business and have unlimited liability for its debts, and one or more limited partners who invest in the business and have limited personal liability. The LP must have at least one general partner and at least one separate limited partner which may not be the same person.

Limited Personal Liability

The protection generally afforded a corporate shareholder, limited partner or a member of a limited liability company from the debts of and claims against the company.

[ M ]


Majority
More than 50 percent; commonly used as the percentage of votes required to approve certain company actions.

Management

The persons who are responsible for the operation of the entity such as the board of directors and executive officers of a corporation, the members or managers of a limited liability company or similar business entity.

Managers

The individuals who are responsible for the maintenance, administration and management of the affairs of a limited liability company (LLC). The managers generally serve at the discretion of the members. Specific duties of the managers may be detailed in the company agreement of the LLC. The members of an LLC may also serve as the managers. The manager needs to execute a document acknowledging that it is the manager and agrees to be bound by the company agreement with respect to the duties of the manager.

Managing Company

A separate company from the Operating Company that manages the assets of the Operating Company in return for a management fee.

Managing Member

A Member of an LLC that also serves as a manager of the daily operations.

Members

The owner(s) of a limited liability company (LLC). Unless the Company agreement provide otherwise, management of an LLC is vested in the members in proportion to their ownership interest in the company.

Membership Certificates

Evidence of ownership of and membership in a limited liability company.

Membership Interest

Ownership in an LLC defined as a percentage or other interest of the income and expense of the Company.

Merger

The statutory combination of two or more entities in which one of the entities survives and the other corporations cease to exist.

Minimum Tax

The minimum franchise tax due in Delaware for Corporations is $175 for all Corporations with less than or equal to 3,000 shares, or with less than or equal to $75,000 in Assumed Capital.

Minutes

The written record of deliberations and decision of the management of the entity. These are usually kept in the minute book in diary fashion.

[ N ]


Name Change Amendment
A formal filing with the Secretary of State that amends the original company name.

Name Registration

The filing of a document in a foreign state to protect the company name, often in anticipation of qualification in the state.

Name Reservation

A procedure that allows a company to obtain exclusive use of a name for a specified period of time.

Net Assets

Gross assets, less all obligations, expenses and taxes due.

No Par Value Shares

Shares for which the certificate of incorporation do not fix a par value and that may be issued for any consideration determined by the board of directors.

Not-for-Profit Corporation

A not-for-profit corporation is generally organized for some socially beneficial purpose, rather than for the direct monetary benefit of the directors or members. Not all not-forprofit corporations are tax exempt and some make a profit. However, the profit is not distributed to the stockholders or directors. Also known as a non-profit corporation. To be tax exempt the corporation must file an application with the IRS on form 1023.

Nonresident Alien

A nonresident is a person who is not a citizen of the U.S. and does not hold resident alien status (holds a green card). A Non-Resident Alien can form a Delaware business entity.

Nonstock Corporation

A corporation which does not have the authority to issue stock. A non-profit corporation is formed as a non-stock corporation.

Notice of Litigation

See Notice of Service of Process

Notice of Service of Process

Official notification of a legal action or proceeding having been commenced against the company by the delivery of a legal or court document, generally to the company’s Delaware registered agent.

[ O ]


Officers
Individuals appointed by the board of directors who are responsible for carrying out the board’s policies and for making day-to-day decisions.

Operating Agreement

Also called a Company Agreement, a contract among the members of a limited liability company governing the membership, management, operation and distribution of income of the company.

Organizational Meetings

Meetings of incorporators or initial directors that are held after the filing of the certificate of incorporation to complete the organization of the corporation.

Organizer

The person(s) who perform the act of forming a limited liability company, the incorporator.

[ P ]


Paid in Capital
The actual consideration paid for shares.

Parent Company

A company which owns a controlling interest in another company.

Partnership

A business organization in which two or more persons agree to do business together. Under Delaware Law a general partnership is a partnership where all partners are liable for the obligations of the partnership, a general partnership may be registered on unregistered.

Partnership Agreement

A private agreement between partners that establishes a partnership and governs the terms and conditions of the partnership relationship.

Par Value

A minimum price of a share below which the share cannot be issued, as designated in the certificate of incorporation.

Pass-Through Taxation

Rather than taxing the income of the entity at the entity level, taxation is “passed through” to the individual shareholders in S Corporations, members of an LLC or partners of a partnership and taxed at the individual level. Income or losses are declared on their individual’s tax returns.

Perpetual Existence

Unlimited term of existence; characteristics of most registered business entities.

Piercing the Corporate Veil

Piercing the corporate veil is a legal theory sometimes used to impose personal liability on shareholders, officers, and directors for corporate acts or the members, managers or partners of LLC’s and LP’s.. This theory permits a court to disregard the separate identity of the company.

Preemptive Rights

The right of a shareholder to subscribe ratably for his or her proportion of any additional shares issued by a corporation.

Preferred Shares

A class of shares that entitles the holders to preferences over the holders of common shares, usually with regard to dividends and distributions of assets upon dissolution or liquidation.

Principal Place of Business

The actual, physical location wherein a company conducts the greatest portion of its business. Not the same as Registered Office.

Private Corporation

A Corporation whose shares are not publicly traded on any exchange.

Professional Corporation

A corporation whose purposes are limited to professional services, such as those performed by doctors, dentists and attorneys. A professional corporation is formed under special state laws that stipulate exactly which professionals are required to incorporate under this status.

Promoter

A promoter, in a corporation context, is one who generates interest and activity in and on behalf of a corporation before its formation.

Proxy

A written authorization given by a person to another party directing the party to vote on behalf of him/her.

Public Corporation

A Corporation that trades its stock on a national stock exchange like the New York Stock Exchange or NASDAQ. Public corporations are regulated by the Securities and Exchange Commission.

[ Q ]


Qualification
The filing of required documents by a corporation to secure a certificate of authority to conduct its business in a state other than the one in which it was formed.

Quorum

The percentage or proportion of interest required to be represented in person or by proxy to constitute a valid meeting.

[ R ]


Record Date
The date for determining the persons entitled to vote at a meeting, receive dividends, or participate in any company action.

Redeemable Shares

Shares subject to purchase by the corporation on terms set forth in the certificate of incorporation.

Registered Agent

A person or entity designated to receive state franchise tax and legal documents on behalf of the entity. The Registered Agent must be located and available at a legal address within the state at all times. Failure to maintain a Registered Agent in the state will result in the forfeiture of the company’s charter. Also known as a Resident Agent.

Registered Office

The statutory address of a corporation. It is usually the address of the Registered Agent. The registered office is not generally the company’s principle place of business.

Regulations

Regulations are administrative rules which have the force and effect of law. Government agencies promulgate rules. If the company does not comply, it is subject to the possibility of fines or revocation of its charter.

Reinstatement

Returning a company that is void to good standing on a state’s records.

Renewal

The act of filing formal documents to renew a void charter.

Resolution

A formal statement of any item of business that has been voted upon.

Restated Certificate

Document filed with the Secretary of State that allows an entity to restate or amend and restate any Certificate previously filed to combine into one document which reflects all amendments which had been filed in the past.

Revival

See “Renewal.”

Revised Model Business Corporation Act
A model corporation statute compiled by the American Bar Association that has been adopted in whole or in part by, or has influenced the statutes of many states.

Revocation

The official act of revoking a voluntary dissolution so as to allow the entity to continue to conduct business as that entity.

[ S ]


S Corporation
A corporation electing a special tax status as specified under the Internal Revenue Code. The code is very explicit on how and when this election is made and the number of shareholders this type of corporation can have. Since this type of corporation pays no income tax, all income and expense of the corporation passes through to the individual shareholders in proportion to their holdings. Limited to 100 shareholders who must be U.S. resident individuals.

Scrip

A form used to represent ownership of fractional shares in lieu of issuing share certificates.

Security

An interest in a company issued to an investor who will rely on the expertise and efforts of others for a return on its investment in the company.

Securities Laws

State and federal laws that govern the issuance, sale and transfer of interests in companies to the public and debt issued by the company to the public.

Service of Process

See Notice of Service of Process.

Share

The unit into which the ownership interest in a corporation is divided.

Share Exchange

A statutory form of business combination in which some or all of the shares of one corporation are exchanged for some or all of the shares of another corporation and neither corporation ceases to exist.

Shareholders

Shareholders are the owners of a corporation. They own an interest in the corporation evidenced in stock rather than owning specific corporate property. Also known as stockholders.

Short-Form Merger
The statutory merger of a subsidiary into its parent corporation in which minority shareholder approval is not required.

Sole Proprietorship
An unincorporated business with a sole owner in which the owner is personally liable for business debts and claims against the business.

Special Meeting

A meeting called so that the shareholders, directors, members, managers or partners may act on the specific matters stated in the notice of the meeting.

Statement of Incorporator
A document created by the Incorporator that passes any possible elements of control over the Corporation to the initial Directors.

Statement of Organizer
A document created by the Authorized Person that passes any possible elements of control over the LLC to the initial Members.

Status

An indicator within the records of the Secretary of State indicating whether or not an entity is current with franchise taxes and other filings.

Statutes
Statutes are laws passed by the state legislature or U.S. Congress. Business corporation laws are statutes. Statutes often authorize an administrative agency to declare regulations which are used to supplement the statute. In the event of a conflict, statutes control over regulations.

Statutory Trust
An entity previously called a “Business Trust” which is created by a grantor through a Governing Instrument or a Trust Agreement wherein assets are placed into a trust, managed by at least one Delaware based trustees which may have, pursuant to the Trust Agreement, advisors. The income and expense of the trust are distributed and paid to beneficiaries. In Delaware, the grantor can act as a trustee and/or advisor, and be a beneficiary, and still maintain limited liability protection of any personal assets.

Stock
Stock represents ownership in a corporation. It may be represented by a certificate and can be common or preferred, voting or non-voting, redeemable, convertible, etc.. The classifications and special designations, if any, of the stock are set forth in the Certificate of Incorporation.

Stock Certificate
Evidence of ownership of shares in a corporation. May also be referred to as a share certificate.

Stock Purchase Agreement

A stock purchase agreement is an agreement between the shareholders and the corporation. It provides a mechanism to regulate the transfer and sale of corporate stock. Often, a stock purchase agreement will provide a right of first refusal in favor of the corporation or remaining shareholders in the event of a proposed sale of stock by a shareholder. A stock purchase agreement can also provide for a purchase upon the death, disability, retirement, discharge, resignation, or bankruptcy of a shareholder.

Stockholders
See, Shareholders.

Stock Transfer Legend
Is a written and conspicuous notice on the face of a stock certificate intended to notify any purchaser of the stock that the transfer of the stock is subject to certain limitations as stated in the legend or in a separate document specifically referred to in the legend.

Subchapter S Corporation
See, “S Corporation.”

Subchapter S Election
The formal election made by a general or close Corporation to be taxed as a partnership with pass-through taxation. This election is made when IRS Form 2253 is filed in a timely manner.

Subscribers

Persons who agree under specific conditions to purchase shares in a corporation.

Subscription

The agreement executed by a subscriber.

Subsidiary

A corporation that is either wholly owned or controlled through ownership of a majority of its voting shares, by another corporation or business entity.

[ T ]


Takeover
A merger, acquisition or other change in the controlling interest of an entity, either with or without the consent of management.

Target

A corporation that is the focus of a takeover attempt.

Tax-Exempt Organization

Any organization that is determined by the Internal Revenue Service to be exempt from federal taxation of income. A tax-exempt may be required to operate exclusively for charitable, religious, literary, educational or similar types of purposes. Donations of money or property to a Tax-Exempt Organization are deductible to the donor on his income tax return.

Tort

A tort is any act or failure to act (if there was a duty to act) which causes harm or damage to another. Examples of torts include assault, battery, fraud, misrepresentation, defamation, libel, slander, invasion of privacy, and negligence. If there is a claim against an entity, other than a claim by the government, it will likely be based in either contract or tort.

Trademark

A word or mark that distinctly indicates the ownership of a product or service, and that is legally designated by the U.S. Patent and Trademark Office for the exclusive use of that owner.

Transfer Ledger

See “Stock Transfer Ledger.”

Treasury Shares

Shares of a corporation reacquired by a corporation from stockholders.

Trustees

Individuals or entities appointed by a Governing Instrument to manage and invest the trust assets.

Trusts

Mechanism wherein assets can be transferred by the settlor to a trustee under a Trust or other Governing Instrument.

[ U ]


Underwriter
A company that purchases shares of a corporation and arranges for their sale to the general public.

USA PATRIOT ACT
An official Act of Congress that among other limitations and requirements, places limitations on financial institutions.

[ V ]


Void
The status given to an entity that has failed to pay its franchise taxes.

Voluntary Dissolution
Action by a company to dissolve the company.

Voting Rights
Rights of the owners of an entity to vote their ownership interest pursuant to provisions of statutes, the certificate of incorporation, the certificate of formation or the company agreement.

Voting or Pooling Agreement
A voting or pooling agreement is an agreement of two or more owners of an entity to vote their ownership interests in a certain manner. The most common use of this agreement would be to pool voting strength for the election of directors or managers.

Voting Stock
Stock, typically common stock, that entitles the holder to vote at a stockholder meeting.

Voting Trust
A voting trust is an agreement among the shareholders of the corporation. Under a voting trust, shareholders transfer their shares of stock to a voting trustee in exchange for voting trust certificates. The voting trustee votes the shares in the manner directed in the voting trust agreement. Voting trusts are often used to preserve control of the corporation.

[ W ]


Watered Shares
Shares that have been issued for a consideration less than the par or stated value of the shares.

Winding Up

The discharging of a company’s liabilities and the distributing of its remaining assets to its owners in connection with its dissolution.

Withdrawal

The statutory procedure whereby a foreign corporation obtains the consent of a state to terminate its authority to transact business in such state.

[ Z ]


Zero Coupon Convertible Bond
A bond issued at a deep discount by a corporation that can be converted into stock at a certain price or redeemed for full value at maturity. These bonds do not pay interest.