Definitions

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
person authorized by another to act on their behalf. Thus, an agent can enter into contracts and other such legal binding functions on behalf of another. Usually, the corporation's officers act as corporate agents.

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.

ApostilleIs
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 (also called fictitious name and Doing Business As) are typically filed at the county level with the county recorders office. 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 unissued shares that can distributed at a latter time.

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.

C

Capital Gains or Losses
Gains or losses 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
Is a document issued by the proper state authority to a foreign corporation granting the corporation the right to do business in that state.

Close Corporations
A close corporation is a corporation that possesses the following traits: a small number of shareholders; no ready market for the corporation's stock; and substantial participation by the majority shareholders in the management of the corporation. Some states have close corporation statutes. This kind of corporation typically has 30 to 50 stockholders and is a good match for businesses in which the majority of stockholders is actively involved in the management of the company.

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 assure 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.

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
Is the termination of a corporation's legal existence. Dissolution may be caused many ways 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 a domestic corporation in the state where it has incorporated.

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.

E

Equity
The ownership of a shareholder in a corporation.

EIN or Employer Identification Number
This form is used to apply for a federal tax ID number. You will receive this form in your corporate kit.

F

Fictitious Name
See doing business as.

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 register for a certificate of authority to transact business in the other state or possibly lose access to that state's courts and face fines.

Franchise Tax
Is a tax on the privilege of carrying on 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.

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.

H

I

Incorporator
The person or entity that prepares, files and signs the articles of incorporation; everything necessary for incorporation. This could entail raising funds and bringing in the people who will be investing. This preparatory work also includes preparing and filing the required documents.

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-Profits.

IRS Form SS-4
This form is used to apply for a federal tax ID number. You will receive this form in your corporate kit.

IRS 2253
This form is used to apply for S corporation status

L

Limited Liability Company
A Limited Liability Company is a hybrid between a partnership and a Corporation. The advantage of a Limited Liability Company is that most states require fewer formalities be observed in 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."

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
A member's 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 business decisions of an LLC are made by the members unless the articles of organization provide that the LLC will 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
A written record which details the events of the corporation. These records should be kept in the corporation's or LLC's record book.

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 articles of organization (for LLCs). A name can be reserved, usually for 120 days, by applying with the proper state authorities and paying a fee.

No-Par-Value Stock
Stock with no minimum value. Most states allow no-par stock. If the stock is no-par stock then the amount of stated capital is an arbitrary amount assigned by the board of directors. Further, the value of capital for franchise tax purposes is determined by the state and this may result in higher franchise taxes in comparison with low par-value stock.

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.

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 LLC's members which govern the LLC's operations and the rights of its members. It is analogous 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.

P

Paid in Capital Requirements
A few states require corporations to have a specified amount of paid in capital prior to starting business. These states include CT, DC, SD and TX and require that the company have $1,000 in paid in capital before starting business.

Partnership
A partnership is owned by two or more people, who are personally liable for all business debts and obligations. A general partnership can come into existence without the need to file any formal papers with any state official.

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. Keeping proper records and holding regular meetings help solve this possible problem.

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
Stock which 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 can not attend a meeting, the shareholder is allowed to vote by proxy. A proxy grants another individual the power to vote on their behalf.

Q

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 be located in the state of incorporation or organization in order to receive all legal notifications. The registered agent will receive important legal and tax documents, such as franchise tax forms and annual report forms. Also known as a Statutory Agent.

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.

S

S-Corporation
An S corporation, which is limited to 75 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.

Section 1244 Stock
An individual investor in a corporation which meets the Section 1244 requirements is entitled to treat up to $50,000 (or $100,000 if filing a joint return) of losses on the 1244 section stock as ordinary losses.

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 effect 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.

T

U

Ultra Vires
Traditionally, the purpose of a corporation was closely spelled out in its articles of incorporation. If the corporation acted beyond its described purposes these actions were unenforceable against the corporation or by the corporation. However, most modern statutes allow corporate purposes to be any lawful activity.

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.

# or Symbol

1023
This form is used to apply for tax-exempt status with the IRS. This is mainly used for Non-Profits.

2553
This form is used to apply for S corporation status

501 (c) 3 Language
States that the organization is organized exclusively for charitable, religious, educational and scientific purposes, including, for such purposes, the making of distributions to organizations that qualify as exempt organizations.

SS-4
This form is used to apply for a federal tax ID number. You will receive this form in your corporate kit.