Common Incorporation Terms

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A B C D E F G H I J K L M N O P Q R S T U V W X Y Z

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A

Accrual Method

An accounting method under which income is subject to tax after all events have occurred which fix the right to receive such income and deductions are allowed when all the events have occurred to fix the obligation to pay the debt.

Agent

This person is authorized by another to act on their behalf. This is usually used in reference to ‘Registered Agent’. In such a case, the Registered Agent is the person who accepts both legal and other documents from the state government, federal government and IRS. Corporations are generally required to maintain a Registered Agent in any state in which they conduct business.

Aggregate Par Value

Aggregate par value is the par value multiplied by the number of authorized shares. This amount is important in determining initial fees and annual franchise taxes in many states.

Annual Meeting of Shareholders

Nearly all states require a corporation to hold an annual meeting of shareholders, at which time directors are elected and other corporate issues are voted on.

Apostille

A method of certifying a document for use in another country pursuant to the 1961 Hague Convention. With this certification by apostille, a document is entitled to recognition in the country of intended use, and no certification or legalization by the embassy or consulate of the foreign country where the document is to be used is required.

Articles of Incorporation

While different states may refer to this as a charter or a certificate of incorporation, the articles of incorporation, which conform to state law, must be filed with the proper state authorities and must convey the purpose of your corporation, the name, the primary place of business, names of directors, and the amounts and types of stock it is authorized to issue. .

Articles of Organization

Limited liability companies or LLCs must file articles of organization. This parallels the articles of incorporation in many ways.

Asset

Anything owned that has monetary value.

Assumed Name

A name under which a corporation conducts business that is not the legal name of the corporation as shown in its articles of incorporation. Assumed names are frequently called DBA or “doing business as”. A corporation can use multiple assumed names.

Authorized Shares/Stock

The total number of shares a corporation is authorized to issue. This number is specified in the articles of incorporation. All of the shares authorized need not be issued to shareholders, the corporation can have un-issued shares that may be distributed at a later time.

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B

Business Entity

An organization that possesses a separate existence for tax purposes. Some types of business entities include corporations and foreign corporations, business trusts, limited liability companies, and limited partnerships.

Business Judgment

The rule states that directors of corporations will not be held personally liable for unwise business decisions providing that the directors made an informed decision and that decision was not tainted by self-interest.

Bylaws

Bylaws are the rules and regulations adopted by a corporation for its internal governance. It usually contains provisions relating to shareholders, directors, officers and general corporate business. At the corporation's initial meeting the bylaws are adopted. Bylaws are a private document not filed with any state authority. Bylaws are more flexible than the articles of incorporation because they are easier to amend.

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C

Capital Gains or Losses

Gains or losses are realized from the sale or exchange of capital assets. The amount is determined by calculating the difference between an asset's purchase and sale price.

Capital Stock

See Authorized stock.

Cash Method

An accounting method under which income is subject to tax when actually received and deductions are allowed when actually paid.

C Corporation

A C corporation is simply a standard business corporation. It is called a C corporation because it is taxed under subsection C of the IRS code.

Certificate of Authority

This is a document issued by the proper state authority to a foreign corporation granting the corporation the right to do business in that state.

Common Stock

The primary stock of a corporation. This stock gives shareholders the right to participate in management of the corporation and give the shareholder a proportionate share of the dividends.

Corporate Record Book

Maintaining the proper records is very important to maintain limited liability to corporate shareholders. The corporation should have a record book, which contains a copy of the articles of incorporation, bylaws, initial and subsequent minutes of directors and shareholders meetings and a stock register.

Cumulative Voting

This method of voting is intended to create adequate representation of minority shareholders. Cumulative voting allows shareholders to aggregate their votes in favor of fewer candidates than there are slots available.

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D

Directors

Directors are elected by the shareholders. They manage or direct the affairs of corporation. Typically, the directors make only major business decisions, major policy changes and monitor the activities of the officers. They are the people who primarily manage the corporation.

Dissolution

Dissolution refers to the termination of a corporation's legal existence. Dissolution may occur for many reasons, including failure to file annual reports, failure to pay certain taxes, bankruptcy, or voluntary dissolution of the corporation by the shareholders and directors. .

Doing Business As (DBA)

A "DBA", also known as an "assumed name", is typically completed by making a filing at the county level where the business is located. This filing does not change the official name of the corporation; however, it allows the company to use additional names.

Dividend

A dividend is a distribution of money or property paid by the corporation out of the corporation's profits to shareholders. Dividend payments are subject to double taxation, the corporation pays tax on its profits and the dividend recipient must pay income taxes on the dividend payment, the same money is taxed twice. The directors of the corporation decide if a dividend payment is to be made and it can only be made if the corporation has profits.

Domestic Corporation

A corporation is considered to be domestic in the state where it has incorporated. In all other states it would be considered foreign.

Double Taxation

Corporations are treated as a separate legal taxable entity for income tax purposes. Therefore, corporations pay tax on their earnings. If corporate earnings are distributed to shareholders in the form of dividends, the corporation does not receive the reasonable business expense deduction, and dividend income is taxed as regular income to the shareholders. Thus, to the extent that earnings are distributed to shareholders as dividends, there is a double tax on earnings at the corporate and shareholder level. S corporations and LLCs are pass-through entities, which are not subject to the double tax.

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E

Equity

The ownership of a shareholder in a corporation.

EIN or Employer Identification Number

This is commonly referred to as the social security number for the business. It is a separate number issued by the IRS for tax purposes. Generally, banks require an EIN for the purpose of opening a bank account. Also, it is a way to formally separate your business from your personal activities for tax purposes.

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F

Fictitious Name

See doing business as (DBA).

Fiscal Year

Any twelve-month period used by a business as its fiscal accounting period.

Federal Tax Identification Number

This is a number assigned to a corporation or other business entity by the federal government for tax purposes. Banks generally require a tax identification number to open bank accounts. The federal tax identification number is also known as the Employer Identification Number (EIN).

Foreign Corporation

A corporation is referred to as a foreign corporation in all states except for the state where it is incorporated. If a corporation is "transacting business" in a state other than where it is incorporated, it must generally register for a certificate of authority to transact business in the other state.

Franchise Tax

This is a tax on the privilege of conducting business as a corporation or LLC in a state. The value of the franchise tax may be measured by amount of earnings, total value of capital or stock, or by amount of business done. In some states, like California, the franchise tax is simply an income tax.

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G

General Corporation

This is the most common legal structure for incorporation. You can have an unlimited number of shareholders, and each shareholder's personal liability is proportional to his or her amount of investment.

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H

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I

Incorporator

The person or entity that prepares, files and signs the articles of incorporation or articles of organization, in the case of an LLC. This could entail raising funds and bringing in the people who will be investing.

Indemnify

To reimburse or compensate. Directors and officers of corporations are often reimbursed or indemnified for all the expenses they may have incurred during the incorporation process.

IRS Form 1023

This form is used to apply for tax-exempt status with the IRS. This is mainly used for Non-Profit Corporations.

IRS Form SS-4

This form is used to apply for a federal tax ID number.

IRS 2253

This form is used to apply for S corporation status.

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J

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K

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L

Limited Liability Company

A Limited Liability Company is a hybrid between a partnership and a Corporation. One advantage of a Limited Liability Company is that most states require fewer formalities be observed for an LLC in comparison to a corporation.

Limited Liability Partnership

A partnership in which the liability of all partners is limited. Generally, the partners are not responsible for the debts, obligations, or liabilities of the partnership resulting from the actions or negligence of another partner, employee or agent of the partnership.

Limited Partnership

A partnership in which the duties and obligations of the partners are divided between "general partners" and "limited partners."

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M

Manager

An LLC may be operated by a group of managers who act much like a board of directors. If an LLC is to be controlled by managers this fact must be stated in the articles of organization.

Membership Interest

Ownership of an LLC is represented by "interests", just as a partner has an interest in a partnership and shareholders own stock in a corporation.

Member

A member is a person or entity who is an owner of some or all of a Limited Liability Company. The members make the business decisions of an LLC unless the articles of organization provide that the LLC will be controlled by a manager or managers. .

Merger

A merger occurs when two corporations join together into one, with one corporation surviving and the other corporation disappearing. The assets and liabilities of the disappearing entity are absorbed into the surviving entity.

Minutes

This is a written record, which details the events of the corporation. These records should be kept in the corporation's or LLC's record book.

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N

Name Reservation

The name of a corporation or LLC must be distinguishable on the records of the state government. If the name is not unique, the state will reject the articles of incorporation or organization. A name can be reserved, usually for 120 days, by applying with the proper state authorities and paying a fee.

Nonprofit Corporation

People in nonprofit corporations come together to either benefit members of an organization or for some public purpose, such as a hospital, environmental organization or literary society. Nonprofit corporations can make a profit, but the business cannot be designed primarily for profit-making purposes, and the profits must be used for the benefit of the organization or purpose that inspired the corporation. These corporations can apply for tax-exempt status at both the federal and state level. Not-for-profit corporations must file not-for-profit articles of incorporation with the state.

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O

Officers

The directors appoint officers. They manage the daily affairs of the corporation. A corporation's officers usually consist of a president, vice-president, treasurer and secretary. In most states, one person can hold all of these posts.

Operating Agreement

An agreement among the members of an LLC, which governs the operations of the LLC and the rights of its members. It is similar to corporate bylaws.

Organizational Meeting

The initial meeting where the formation of the corporation is completed. At the organizational meeting a number of initial tasks are completed such as: the articles of incorporation are ratified, the initial shares are issued, officers are elected, bylaws approved, and a resolution authorizing the opening of bank accounts is passed. If the initial directors are named in the articles of incorporation, they can hold the organizational meeting. If they are not named, then the organizational meeting is held by the incorporator.

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P

Partnership

A partnership is a business owned by two or more people. Generally, they are personally liable for all business debts and obligations.

Par-Value

The stated minimum value of a share stock. Stock must be sold for at least this value or the owner of the stock can face liability. With low par value stock or no par value stock this liability is minimized.

Pass-Through Taxation

The income to the entity is not taxed at the entity level; however, the entity does complete a tax return. The income or loss as shown on this return is "passed through" the business entity to the individual shareholders or interest holders, and is reported on their individual tax returns. S corporations and LLCs are both pass-through tax entities. .

Piercing the Corporate Veil

If corporate formalities are not followed, it is possible that the corporate entity will not protect shareholders from corporate debt and legal liability. For this reason, following the applicable compliance rules for your entity type is of paramount importance.

Preemptive Rights

Rights delineated in the articles of incorporation granting shareholders the first opportunity to buy a new issue of stock in proportion to their current equity percentage. The shareholder has the right to buy the new issue of stock, but is not required to make the purchase. If the shareholder elects not to exercise this right, the shares can be sold on the open market.

Preferred Stock

This stock type generally provides the shareholder with preferential payment of dividends but does not carry voting rights. If a corporation is to have preferred stock, this fact must be stated in the articles of incorporation.

Professional Corporation

A legal structure, typically formed by licensed professionals such as lawyers, doctors, and accountants. In this kind of structure, a professional is not free from personal liability for his or her own negligence. Unlike a general partnership, however, owners are not personally liable for the malpractice of other owners.

Proxy

If a shareholder cannot attend a meeting, the shareholder is allowed to vote by proxy. A proxy grants another individual the power to vote on their behalf.

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Q

Quorum

The minimum attendance required to conduct business at a meeting. Usually, a quorum is achieved if a majority of directors are present (for directors meetings) or outstanding shares are represented (for shareholder meetings). The percentage needed for a quorum may be modified in the bylaws.

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R

Registered/Resident Agent

According to state laws, corporations and LLCs located out of state must have a registered agent. This Agent must be named in the articles of incorporation and states generally require an in-state agent for every state where the company conducts business. The registered agent will receive important legal and tax documents, such as franchise tax forms and annual report forms.

Registered Office

The office named in the articles of incorporation. The registered office must be where the registered agent is located, and need not be the principal office or place of business of the corporation.

Resolution

A resolution is a formal decision of the corporation, which has been adopted by either the shareholders or the board of directors.

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S

S-Corporation

An S corporation, which is limited to 100 or fewer shareholders, provides the benefits of incorporation, but it eliminates "double taxation," which is when the profits of a corporation are taxed first as income to the corporation and then second as income to the shareholders when profits are distributed as dividends.

Share

An interest in a corporation. The total ownership of a corporation is divided into shares of stock.

Shareholder

Any holder of one or more shares in a corporation. A shareholder usually has evidence that they are a shareholder; this evidence is represented by a stock certificate.

Sole Proprietorship

A business owned and managed by one person, who is personally liable for all business debts and obligations. For tax purposes, the owner and his or her business are one entity, meaning that business profits are reported and taxed on the owner's personal tax return.

Stated Capital

The par value of shares multiplied by the number of shares outstanding. The amount of stated capital may affect the ability to pay dividends.

Stock

An equity or ownership interest in a corporation, measured in shares. Ownership of shares is demonstrated by stock certificates. .

Stock Certificate

A written instrument that shows ownership of shares in a corporation.

Stockholder

See shareholder.

Stock Transfer Book

A record book, which lists the owners of shares of stock in a corporation.

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T

Treasury Shares

Shares of stock, which were issued and later acquired by the corporation.

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U

Unanimous Written Consent

Nearly all states allow directors and shareholders to act without a meeting if they each give their consent to specific corporate actions in writing.

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V

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W

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X

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Y

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Z

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