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A
AGGREGATE PAR
VALUE
Total par
value of all authorized
shares or the value of all stated
capital.
ANNUAL
MEETING
A
yearly shareholder meeting required by law and held
at the time designated in the corporate bylaws.
Shareholders gather to vote on the appointment or
removal of directors and the approval of
fundamental changes in the corporation. A
quorum of shares must be
represented at the meeting and/or vote to be held.
Most states require that a majority of the shares
entitled to vote must approve any shareholder
decisions. Some states permit that no annual
meeting is required if all shareholders consent to
the decisions. Some states even relax this
restriction by requiring only a quorum to approve
the written request.
ARTICLES OF
INCORPORATION
The
basic instrument for incorporating the business.
Also known as a certificate of incorporation,
articles
of organization, articles of association, or
other similar name. The required contents of this
document are generally prescribed in the state
general incorporation statutes and include the
corporation's name, period of existence, purpose
and power, authorized number of shares, classes of
stock, and other conditions of
operation.
ARTICLES OF
ORGANIZATION
This is the name customarily
given to the document that is filed with the proper
state authorities (usually the Secretary of State)
in order to form a limited liability company. It is
similar in content and function to the
articles
of incorporation for a corporation.
ASSUMED
NAME
An
entity's name, other than its legal name, under
which it conducts business. While this is another
name under which a business operates, it does not
change the legal name of the business. Most states
require an entity doing business under an assumed
name to file an assumed name certificate with the
Secretary of State and to register the assumed name
with appropriate local authorities. Also known as
Trade
Name
AUTHORIZED
SHARES
The
maximum number of shares which the corporation's
articles of incorporation permit the business to
issue. Modern corporate practice recommends
authorizing more shares than the corporation is
currently planning to issue.
B
BUSINESS
ENTITY
An
organization which has a separate and distinct
legal existence from its owners or
members.
BUY-SELL
AGREEMENT
A
purchase arrangement, common among smaller,
closely-held firms, in which other owners or the
firm itself agree to purchase the ownership stake
of a withdrawing owner or member. This allows for
both an orderly transition of ownership and the
opportunity to keep ownership within the group of
initial investors.
BYLAWS
Rules adopted by an
association or corporation for its internal
governance. Bylaws define the rights and
obligations of various officers, persons or groups
within the corporate structure and provide rules
for routine matters such as calling meetings. Most
state corporation statutes contemplate that every
corporation will adopt bylaws, but this is a
private document which need not be filed with the
state. Bylaws are adopted by the board of directors
at the shareholders'
initial meeting.
C
CERTIFICATE OF
AUTHORITY
Official state certification
granting a business local operating authority to a
foreign
corporation or a limited
liability company.
CERTIFICATE OF
GOOD STANDING
Also known as a certificate of
existence. This certificate is official
documentation of a firm's existence and is issued
by a business's home state government. This
document is usually required by a state agency
seeking to qualify a foreign
corporation as authorized to conduct
business within the state.
CORPORATION
A
regular business
corporation or C Corporation is governed
by Subchapter C of the Internal Revenue Code. By
filing articles of incorporation with state
authorities, owners of the organization can create
this separate legal entity to limit their business
liabilities. Drawbacks for this type of
organization include double
taxation of company income. This
entity is distinguished from S
Corporations which are governed by
Subchapter S of the Internal Revenue Code. To find
out more, see C
Corporation. See also S
Corporation
CLASSES OF
SHARES
State statutes generally
authorize corporations to issue two or more types
or classes of stock. These will vary with respect
to dividend rights, voting
rights, and their right to the
assets of the corporation upon liquidation. The
most popular classifications of stock are
common
shares or preferred
shares.
CLOSE
CORPORATION
A
corporation whose shares, or at least voting
shares, are held by a single shareholder or closely
knit group of shareholders, typically not numbering
more than 30 to 50. Generally, there are no public
investors and its shareholders are active in the
daily operation of the business. This type
corporation is a creation of state government, and
not all states offer this type of organization. For
federal tax purposes this entity will have to
register with the IRS as a C
Corporation or an S
Corporation.
States which offer close
corporations in Proactive Management's service area
are Arizona, Illinois, Kansas, Minnesota, Missouri,
Ohio, Texas, and Wisconsin.
CLOSELY
HELD
An
organization in which stakes of ownership are held
by a small number of persons who are usually active
in managing and controlling the business. Most
shareholders in these firms enter into buy-sell
agreements with each other at the time of
incorporation in order to keep shares from passing
outside the initial group of shareholders. Closely
held corporations actually represent the majority
of all corporations while accounting for only a
small fraction of total corporate
revenue.
COMMON
STOCK
The
most popular type of corporate stock. It represents
residual ownership rights of the corporation.
Holders of common stock have voting power and
participate in the division of the profits of the
corporation by way of dividends. Such stock is last
to share in the profits of dividing up the property
of corporation on dissolution, after the demands of
creditors and senior security holders are
satisfied.
CONSIDERATION
This is whatever is given in
exchange for something else as an inducement to
enter into an agreement, usually a transaction. For
example, consideration may be money, land,
equipment, goods, services, or stock given in
return for other shares of stock. It addition,
consideration only exists when the parties intend
an exchange to take place. See also Stated
Capital
COMPANY
NAMES
States require that business names be
distinguishable from one another. Names must also
describe the type of organization, such as
corporation, limited liability company, or limited
partnership, by using these words or any
abbreviation thereof in the name of the firm.
Names will include:
Corporation: "Corporation,"
"Company," "Incorporated," "Inc.," "Co."
Limited Liability
Company: "Limited Liability Company,"
"Registered Limited Liability Company,"
"L.L.C."
Limited Liability Partnership:
"Limited Liability
Partnership," "Registered Limited Liability
Partnership," "L.L.P."
CORPORATE
CHARTER
A
document filed with state authorities upon
incorporation of a business. See also
Articles
of Incorporation or Articles
of Organization
CORPORATE
MINUTES
See Minutes
CUMULATIVE
VOTING RIGHTS
Some states allow shareholders the right to
aggregate their votes when voting for corporate
directors. Instead of voting once for each share in
each election for a director, a shareholder can
vote all of their shares times all the elections in
a single election vote. This voting technique may
allow groups of minority shareholders to achieve
minority representation on the board.
D
DBA (DOING
BUSINESS AS)
See Assumed
Name
DIRECTORS
Person(s) appointed or elected
according to the corporate bylaws. Directors are
generally elected by the shareholders and
authorized to manage and direct the affairs of the
corporation. They also typically elect the
corporate officers and only participate in major
business decisions. All of the directors together
form the board of directors.
DISSOLUTION
The
first step to ending a corporation's limited or a
perpetual existence. Dissolution does not terminate
the corporation's existence but it does require
that the corporation wind-up its affairs and
liquidate its assets. This process can be triggered
by a resolution of the shareholders and directors
or by legal default when firms fail to meet
reporting or taxing requirements or by judicial
action such as a bankruptcy ruling.
DIVIDEND
A pro rata payment to shareholders which is
authorized by the board of directors. The payment
can consist of cash or shares.
DOMESTIC
CORPORATION
A
firm is considered domestic in its home state,
where it is incorporated or organized. See
foreign
corporation
DOUBLE
TAXATION
The
structure of taxation under the Internal Revenue
Code which subjects income earned by a corporation
to an income tax at the corporate level and to a
second tax at the shareholder level when the same
income is distributed to shareholders in the form
of dividends. Note that S corporations and limited
liability companies are pass-through business entities
and , thus, not subject to double taxation.
E
EQUITY
CAPITAL
Funds provided by owners of a business in return
for shares of ownership or portions of
membership.
EMPLOYER
IDENTIFICATION NUMBER (EIN) / FEDERAL TAX ID
NUMBER
An
EIN is a nine-digit number (in the form,
12-3456789) assigned to sole proprietors,
corporations, partnerships, estates, trusts, and
other entities for tax filing and reporting
purposes. For example, businesses which will soon
hire employees need their own EIN for payroll tax
filing. An EIN is for use in connection with your
business activities only. Also, most banks require
an EIN to open a business account. See
EIN
Pricing
ENTITY
CLASSIFICATION ELECTION (ECE)
A
request that the IRS change its classification of a
business for Federal tax purposes. LLCs and other
businesses which are not automatically classified
as corporations may request that their default tax
status (sole proprietor for an LLC with one member
and partnership for an LLC with two or more
members) be changed to corporation. To make this
election, the business entity seeking a change in
status must already have received or applied for
its own employer
identification number. Also, when submitting the
form, the date the change is to take effect must
indicated. The proposed effective date cannot be
more than 75 days before the petition is filed and
cannot be more than 12 months after the petition is
filed.
F
FICTITIOUS
NAME
Also known as Trade
Name
FILING
FEE
A federal or state government charge solely for
document processing. Filing fees quoted by
Proactive Management are what the state charges
anyone, they do not include any shipping and
handling charges. See also Filing
Fees and Our
Prices
FIRST
REFUSAL
See Right
of First Refusal
FISCAL
YEAR
Also called an accounting
year. A standard calendar year or other consecutive
12 month time frame which constitutes a business's
annual reporting period. S Corporations have
restrictions on the type of fiscal year used for
tax purposes.
FOREIGN
CORPORATION
A
corporation is considered foreign in all states
where it is not incorporated. Generally, to do
business as a foreign corporation the firm must
register for a certificate of authority to conduct
business in a state other than its home state. See
also domestic
corporation, certificate
of authority, certificate
of good standing
FRANCHISE
TAX
A
state tax levied against corporations and limited
liability companies which conduct business within a
state. The basis for this tax can be income,
activity, or the total value of authorized
shares.
I
INCORPORATOR
The
person(s) or entity who prepares and files with the
state the articles of incorporation/organization.
The role of the incorporator is largely limited to
these acts. Modern corporation statutes usually
only require a single incorporator. See also
Promoters
INITIAL
MEETING
See
Organizational
Meeting
ISSUED
SHARES
Authorized shares of stock
which have been sold by the corporation. A
corporation can only sell up to the number of
shares
authorized in its articles of
incorporation. Any shares issued above the number
of shares the corporation authorized are
unauthorized and, therefore, void.
L
LIMITED
PARTNERSHIP (LP)
A
partnership in which one or
more general partners manage the operation of the
business and are personally liable for the debts of
the organization. There are also one or more
limited partners who invest in the organization and
split the profits. Limited partners do not
participate in the management of the firm and as
such do not incur liability over and above their
investment in the partnership. Duration of the
entity is usually limited in accordance with the
terms of the partnership agreement. Also, the
transferability of ownership interests is generally
limited to existing partners unless otherwise
indicated by the partnership agreement and majority
of the partners. See also Partnership and LLP
LIMITED
LIABILITY PARTNERSHIP (LLP)
A
limited partnership with additional protections for
limited partners not involved in or aware of
prohibited conduct. Limited partners remain jointly
and severally liable for the obligations of the
LLP, except in cases of errors, omissions, or
negligence by another partner or representative of
the LLP where the limited partner has no knowledge
of or participation in these activities. See
Limited
Partnership
LIMITED
LIABILITY COMPANY (LLC)
This entity provides limited
liability to their owners, known as members, but
are taxed like a partnership, preventing
double
taxation. Limits on transferability of
ownership interests can be listed in the
articles
of organization. An LLC is formed upon filing
articles of organization (similar to the process of
filing articles of incorporation to form a
corporation) with the proper state authorities
(usually the secretary of state) and paying all
fees. LLCs are a relatively new entity in the
United States, gaining more widespread acceptance
during the early 1990's, although the concept has
long been used internationally.
M
MANAGER
One
who assists officers in the day to day operation of
the business and who is vested with a certain
amount of judgment.
In an LLC, managers are the
person(s) who act in a role similar to the
board of
directors of a corporation. This
arrangement must be declared in the LLC's
articles
of organization.
MEMBER
Limited
Liability Company: The owners of the LLC are
similar to the shareholders of a corporation.
Members can be individuals, corporations,
partnerships, or trusts. The members make the
business decisions unless they have decided that
managers will run the business instead.
Non-Profit
Corporation: In relation to a Non-Profit
Corporation, any person who on more than one
occasion, pursuant to a provision of a
corporation's articles or bylaws, has the right to
vote for the election of the director or
directors.
MINUTES
Records of the proceedings of
shareholder meetings. In addition to books and
records of account, minutes are to be kept in the
normal course of conducting business in recognition
of corporate formality requirements.
N
NAMES
See Company
Names
NAME
SEARCH
Since the legal name of your
firm has to be different from the names of existing
firms, Proactive Management checks to see if your
proposed names are sufficiently different and
distinct from any existing names on record with the
state. See also Company
Names
NON-PROFIT
CORPORATION
A
corporation formed for some educational, charitable
or benevolent purpose, not for the purpose of
making a profit. While this organization may
generate a profit, it cannot be distributed to its
managers, members, directors, or officers, but used
to further its stated purpose. Generally, these
firms are organized under special federal and state
statutes. Such corporations are also afforded
special tax treatment at both federal and state
levels. In addition, for a corporation to qualify
as a charitable "exempt organization" under IRS Tax
Code § 501(c), a non-profit must be organized
an operated exclusively for a charitable purpose.
However, the IRS is very strict about this
classification and it can be very difficult to
obtain. In addition, non-profit status at the state
level is no guarantee of an "exempt organization"
classification by the IRS. Due to the extensive
state and federal filing and reporting
requirements, Proactive Management asks that you
work directly with your attorney and accountant to
establish and maintain your group's as a
not-for-profit organization status.
NO PAR
STOCK
This stock without par value
but which represents a proportional share of the
ownership of a corporation based on the number of
shares. These shares are issued for the
consideration designated by the board of directors;
such consideration is allocated to stated
capital unless the directors or
shareholders determine to allocate a portion to
surplus capital. A corporation may have both par
and no par value stock.
O
OFFICERS
Individuals appointed or
elected by the corporation's board of
directors to manage the daily
operations of the corporation. The officers
include, a president, vice-president, treasurer,
and secretary. In most states only the President
and Secretary need to be named in the articles of
incorporation, and one person may hold all of the
required officer positions.
OPERATING
AGREEMENT
An
agreement, similar to a corporation's bylaws, made
between the members of a limited
liability company (LLC) which governs the
firm's operations and the rights of the LLC
members. it also provides a general description of
how business will be conducted
ORGANIZATIONAL
MEETING
This is the initial meeting of
a corporation to elect directors and ratify the
articles
of incorporation. The meeting may be held by
the directors if they were appointed in the
articles of incorporation, otherwise, the meeting
is held by the incorporator(s). Initial tasks such
as ratification of the articles of incorporation,
issuance
of the initial shares, election of officers, approval of
bylaws, and authorization
of the opening of bank accounts are completed at
this meeting.
P
PAID-IN-CAPITAL
Money or property given to a
corporation in exchange for the corporation's
capital stock. Some states require corporations to
have a specified amount of paid in capital prior to
starting business. For example, a corporation in
Texas cannot commence business until it has
received at least $1,000.00 for the issuance of
shares. Texas and South Dakota are the
only states in Proactive Management's service area
with a minimum paid-in-capital requirement for
corporations.
PARTNERSHIP
A
business entity in which two or more parties
combine their initial capital to form a business
which they then operate as co-owners. The business
operates for the joint benefit of all the partners.
The firm's profits, liability, and managerial
burden are all shared equally among the partners
even if the initial capital contributions are not
equal. Also, as a pass-through
entity, the partners, not the
partnership, bear the income tax burden. Also,
transferability of ownership interests is generally
limited to existing partners unless otherwise
indicated by the partnership agreement and majority
of the partners. See also Limited
Partnership and Limited
Liability Partnership
PAR
VALUE
The
face or stated value of a share of stock. This is
an arbitrary or nominal dollar amount assigned to
the share by the issuing company. Stock must be
issued for at least this value. Also, most states
allow shares to be listed with "No Par" value.
However, since some states define arbitrary values
to "No
Par" shares when assessing some
filing and reporting fees, the value of these fees
can be higher for "No Par" share than shares with
low par values. Par value has no connection to the
market value of common stock.
PASS-THROUGH
TAXATION
A
situation where the business entity is not taxed
and tax is only paid at the shareholder, partner,
or equity holder level. The business files a tax
return but pays no taxes. Tax is assessed on each
owner's individual income tax return. Partnerships,
S corporations and Limited Liability Companies
operate as pass-through taxation
entities.
PERPETUAL
DURATION
A
non-professional, business corporation or LLC can
exist for an unlimited time unless otherwise stated
in its articles
of incorporation(for corporations) or
articles
of formation/organization(for LLCs). As a
result, these entities are less subject to
dissolution, unlike other
organizations which may have many circumstances
which require that the business discontinue
operations and terminate its legal existence.
PREEMPTIVE
RIGHT
This is a stockholder's
privilege to maintain a proportionate share of
ownership by purchasing a proportional share of any
new stock issues. This right allows existing
stockholders in most states have the right to buy
additional shares of a new issue to preserve their
equity before others have a right to purchase
shares of the new issue. This right protects
shareholders from having their ownership value and
control diluted when new shares are
issued.
PREFERRED
STOCK
This type of stock has no
voting rights but does have liquidation preferences
and dividend distribution preferences over common
stock. Like common stock, any preferred stock must
be declared and described as such in the
articles
of incorporation. However, unless otherwise
specified in the corporation's articles of
incorporation or bylaws, other kinds of
special rights or privileges do not generally
remove a class of stock from the classification of
common
stock.
PRESIDENT
This individual is the principal executive officer
of the corporation and is responsible for
overseeing the business affairs of the firm. He/she
executes documents upon authorization by the board
of directors or on behalf of the corporation in the
ordinary course its business. The President
presides at meetings of the shareholders and of the
board of directors. The occupant of this office
also serves at the discretion of the board.
PROFESSIONAL
CORPORATION
A
special corporation which is formed by
professionals to let them render public services
which require a license or other legal
authorization and which prior to such statutory
authorization could not be performed by a
corporation. These professionals may include, but
are not limited to, accountants, architects,
attorneys, chiropodists, chiropractors, dentists,
engineers, osteopaths, optometrists, physical
therapists, physicians, podiatrists, psychologists,
real estate salespersons, registered nurses,
surgeons, and veterinarians. Professional
incorporation does not alter professional
responsibility or privilege and does not insulate
the individual participants from malpractice
liability.
PROMOTERS
The
persons who, for themselves or others, take the
preliminary steps to the founding or organization
of a corporation or other venture. See also
Incorporator
PROXY
Shareholder authorization allowing another to vote
a shareholder's shares at an entire shareholder
meeting or for a specific shareholder action.
Typically, this declaration of authority to an
agent must be in writing and will not last more
than eleven months unless a different duration is
specified in the agreement.
Q
QUORUM
The number of outstanding (authorized and issued)
shares which are required to be represented at a
shareholder meeting in order for the activities
conducted to have legal authority. Unless otherwise
specified in the articles of incorporation, a
quorum usually consists of a majority of the shares
entitled to vote, but cannot be less than a third
of all shares entitled to vote. Once a quorum is
deemed present at the meeting, it remains in effect
until the close of the meeting. This way,
shareholders who leave before the end of the
meeting cannot strip legal effectiveness from
actions and decisions made after they left but
before the meeting ended.
R
REGISTERED
AGENT/ RESIDENT AGENT
This is a natural person or
entity which is authorized to transact business in
a state, be physically present in that state, and
is responsible for receiving service of process or
official notices addressed to the client
corporation. For a firm's home state, the
registered agent must be named in the articles of
incorporation / organization. Businesses seeking
certificates
of authority to conduct business outside
of their home state must designate a registered
agent within each foreign state. These provisions
ensure that each company operating within a state
has a location within that state where its legal
agent may be found. This way, no firm can operate
in a state and be beyond the reach of the state
government. Generally, if you have a business
location in your state of incorporation, a
director, officer, or employee working in that
location can serve as your registered agent at no
additional cost to you. As a result, registered agent
services are not provided by Proactive Management.
See
also Registered
Office
REGISTERED
OFFICE / RESIDENT OFFICE
The
office of the registered agent named in the
articles of incorporation. The registered office
need not be the principal office or principal place
of business of the corporation, but it must be a
physical address where the registered agent may be
found during business hours. See also
Registered
Agent
RIGHT OF FIRST
REFUSAL
The
right of a third party to match the terms of a
proposed contract between two other parties before
the contract is executed. This gives the holder of
this right the chance to meet any other offer
before the close of the deal.
S
S
CORPORATION
A
small business corporation with a statutorily
limited number of shareholders, which, under
certain conditions, has elected to have its taxable
income taxed to its shareholders at regular income
tax rates. Its major significance is the fact that
S corporation status lets firms avoid the corporate
income tax, and corporate losses can be claimed by
the shareholders. This is referred to as
pass
through taxation as opposed to double
taxation. This election is for federal
tax purposes only; in terms of legal
characteristics under state law, the "S" status
corporation is no different than any other regular
corporation.
SECRETARY
This corporate officer maintains the minutes for
proceedings of shareholders and the board of
directors; sees that notices for meetings are duly
given; maintains the stock transfer records; and
oversees corporate recordkeeping and the use of the
corporate seal. The Secretary also signs with the
President stock certificates of shares authorized
by the board of directors and issued by the
company.
SHARE
(STOCK)
A
share is the basic unit of corporate ownership.
Share ownership bestows proportional rights to both
control of certain aspects of corporate operations
and the division of distributable assets upon the
winding up of the business. See also
Common
Stock and Preferred
Stock
SHAREHOLDER
(STOCKHOLDER)
A
person or entity who owns shares of stock in a
corporation. This is the person or entity in whose
name shares are registered in the records of a
corporation. Shareholders may have evidence of
ownership in the form of stock certificates. These
are formal company documents which
indicate that a certain number of
shares, of a certain class, from a certain company,
have been authorized and issued.
SHAREHOLDER
AGREEMENT
A binding, written agreement between all of the
shareholders of the corporation, which sets out all
aspects of the relationships between and among the
shareholders and the corporation. A shareholder
agreement usually will include items such as
division of profits, shareholder meetings, sale of
shares, stock options, voting rights, right of
first refusal, and buy-sell agreements.
SOLE
PROPRIETORSHIP
A
form of business in which one person (sole
proprietor) owns all the assets of the business and
is solely liable for all the debts of the business
organization. In this form of business, the owner
is legally indistinguishable from the business. So
all insurance, legal, and tax claims against the
business attach personally to the owner. Usually,
the owner and the manager are the same person.
While this is the easiest entity to form, it can
only have one owner. This type of business entity
is the most popular type of small business in the
U.S.
STATED
CAPITAL
This is the amount of capital
contributed by stockholders. It also appears as the
paid-in-capital or equity on the corporate balance
sheet. This value is the sum of the par value per
share of all par value shares issued, the entire
amount received for no-par shares. In some
jurisdictions, only a portion of the amount
received for no-par shares need be included in
stated capital and the remainder may be credited to
paid-in surplus and be distributed as a
dividend.
STOCK
(SHARE)
See
Share
STOCKHOLDER
(SHAREHOLDER)
See
Shareholder
SUBCHAPTER
S
The
subchapter of the Internal Revenue Code which
regulates S
Corporation tax status.
T
TRADE
NAME
The
name or title lawfully adopted and used by a
particular organization engaged in commerce. This
name can be used in advertising, promotion, and to
generate publicity for the business. See
Fictitious
Names, Assumed
Names
TREASURER
This corporate officer is responsible for all
funds, investments, and securities of the
corporation. The Treasurer also maintains all
company records for payables and receivables due
.
TREASURY
SHARES
Stock which has been issued
and subsequently reacquired by the corporation.
These shares are then used by the corporation in
furtherance of company business. Shares which are
unsubscribed and unissued are not included in these
types of shares.
V
VICE
PRESIDENT
A
corporate officer who, in the case of refusal or
incapacity of the President to act, can execute the
duties of that office pursuant to the restrictions
of that office.
VOTING
RIGHTS
Generally, a shareholder is
entitled to one vote for each share of common stock
owned, unless the articles of incorporation or
bylaws of the corporation provide otherwise.
Incorporation statues generally permit the issuance
of one or more classes of non-voting stock, as long
as at least one class of shares has voting rights.
The articles
of incorporation may also limit the number of
votes per share. The shareholder's right to vote is
a fundamental element of the control and management
of a corporation. See also Cumulative
Voting Rights
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