|
Accrual Method of Accounting
A method of keeping accounts which shows
expenses incurred and income earned for a given period, although
such expenses and income may not have been actually paid or
received. Right to receive, and not actual receipt, determines
the inclusion of an item in gross income. Obligations payable
to or by a taxpayer are treated as if they are discharged
when they are incurred.
Adoption
This is a contract principle whereby a person
agrees to assume a contract previously made for his or her
benefit. This concept is applied when a newly formed corporation
accepts a preincorporation contract made for its benefit by
a promoter.
Affiliate
A corporation that is related to another
corporation by shareholdings or other means of control (such
as parent/subsidiaries or corporations under common control).
Agent
Generally, a person authorized by another
(known as the principal to act for or in place of him. An
agent can enter into binding contracts or take legal action
on behalf of another. In the corporate setting, a company’s
officers, directors, and employees may act as corporate agents
depending on their level of responsibility.
Amortization
An accounting procedure which gradually
reduces the cost or value of a limited life or intangible
asset through periodic charges against income. This procedure
is also commonly known as depreciation with the periodic charges
usually treated as current expenses for purposes of determining
income.
Annual Shareholders’ Meeting
Most states require a corporation to hold
an annual shareholders’ meeting during which the shareholders
elect directors and vote on major corporate issues.
Articles of Incorporation
This is the name customarily given to the
document that is filed in order to form a corporation. Depending
on the state statute, it is also known as "certificate
of incorporation," "charter," "articles
of association," or other similar name.
Articles of Organization
This is the name customarily given to the
document that is filed in order to form a Limited Liability
Company. It is very similar in content and function to the
Articles of Incorporation for a corporation.
Asset
Anything owned, whether tangible or intangible,
that has monetary value.
Assumed Name
A name under which an entity (i.e. a corporation)
conducts business that is not the legal name of the entity.
Many states require the filing of a registration in order
to conduct business under an assumed name in their territories.
Authorized Shares
Authorized shares are the shares described
in the articles of incorporation which a corporation is permitted
to issue. It is often advisable to authorize more shares than
will be issued so that the company has a reserve for the future.
Authorized Stock
See Authorized Shares
Blue Sky Laws
State statutes that regulate the sale of
securities to the public within the state. Most require the
registration of new issues of securities with a state agency
prior to sale. These laws also often regulate securities brokers
and salesmen.
Book Value
The value of shares determined on the basis
of the books of a corporation (specifically calculated from
the company’s balance sheet).
Business Judgement Rule
A rule of law which prevents directors of
a corporation from being held personally liable for incorrect
business decisions if the decision was informed and not made
in self-interest.
Bylaws
Bylaws are the formal rules of internal
governance adopted by a corporation. They are usually adopted
at the first shareholders’ meeting, and contain rules
governing the actions of shareholders, directors, officers,
and other actions of the company.
C Corporation
A corporation that is subject to federal
income tax at the corporate level. In other words, it has
not elected S corporation status. The taxable income of a
C corporation is subject to tax at the corporate level while
the dividends continue to be taxed at the shareholder level.
Capital Gain
The profit realized on the sale or exchange
of a capital asset. The gain is the difference between the
cost or adjusted basis of an asset and the net proceeds from
the sale or exchange of such asset.
Capital Loss
A tax term used in reference to a loss incurred
in the sale or exchange of a capital asset.
Capital Stock
Another phrase for common shares, often
used when a corporation has only one class of outstanding
shares.
Capitalization
An imprecise term, usually referring to
the amounts received by a corporation for the issuance of
its shares. It also may refer to the proceeds of loans to
a corporation made by its shareholders.
Cash Method of Accounting
The practice of recording the value of assets
in terms of their cost.
Certificate of Authority
A document issued by a state corporation
authority (e.g. Secretary of State) on application of a foreign
corporation granting it the right to do business in the state.
Certificate of Incorporation
In most states, the document that is prepared
by the Secretary of State that evidences the acceptance of
the articles of incorporation and the commencement of the
corporate existence. In Delaware, the certificate of incorporation
is the name given to the document filed with the Secretary
of State.
Charter
May mean either the document filed with
the Secretary of State (articles of incorporation) or the
grant by the State to conduct business with limited liability.
Close Corporation
A corporation with relatively few shareholders
and no regular markets for its shares. Close corporations
usually have never made a public offering of shares and the
shares themselves may be to subject to restrictions on transfer.
Common Shareholders
The holders of common shares, the ultimate
owners of the residual interest of a corporation.
Common Shares (Common Stock)
The residual ownership in the corporation.
Common shareholders select the directors to manage the corporation,
are entitled to dividends out of the earnings of the corporation
declared by the directors, and are entitled to a per share
distribution of whatever assets remain upon dissolution of
the corporation after satisfying creditors and holders of
senior securities.
Corporate Records
Corporate records usually take the form
of a corporate record book. Carefully maintaining records
is very important to assure limited liability to the corporate
shareholders. The records should include a copy of the articles
of incorporation, the minutes of all shareholder and director
meetings, and a stock register for keeping track of stock
transactions.
Cumulative Dividends
Dividends on preferred shares which carry
over from one year to the next if a preference dividend is
omitted. An omitted cumulative dividend must be made up in
a later year before any dividend may be paid on the common
shares in that later year.
Cumulative Voting
A method of voting that allows substantial
minority shareholders to obtain representation on the board
of directors by allowing a shareholder to cast all of his
or her available votes in an election in favor of a single
candidate.
De Facto Corporation
At common law, a partially formed corporation
that provides a shield against personal liability of shareholders
for corporate obligations.
De Jure Corporation
At common law, a corporation that is sufficiently
formed to be recognized as a corporation for all purposes.
Directors
Directors are elected by the shareholders
and manage the affairs of the corporation. Directors typically
elect the officers and only participate in major business
decisions.
Dissolution
The termination of a corporation’s
legal existence.
Dividend
Payment to shareholders from or out of current
or past earnings.
Domestic Corporation
A corporation is domestic to the state where
it was incorporated.
Double Taxation
Refers to the structure of taxation under
the Internal Revenue Code which subjects income earned by
a C corporation to an income tax at the corporate level and
a second tax at the shareholder level if the previously taxed
income is distributed to the shareholders as dividends. Note
that S corporations and Limited Liability Companies are not
subject to double taxation.
Earnings Per Share
Equals a firm’s net income divided
by the number of shares held by shareholders.
Equity
A financial term referring in general to
the extent of an ownership interest in a venture. Equity refers
not to a legal concept, but to a financial definition that
an owner’s equity in a business is equal to the business’s
assets minus its liabilities.
Equity Financing
Raising money by the sale of stock.
Fiscal Year
A twelve month period used by a company
for accounting purposes.
Federal Tax Identification Number
A number given to a business entity by the
federal government for tax purposes.
Foreign Corporation
A corporation is referred to as a foreign
corporation in all states outside its state of incorporation.
In order to conduct business in another state, it must register
for a certificate of authority to conduct business in the
other state.
Franchise Tax
A tax on the privilege of carrying on business
in a state. It is typically measured by the earnings or amount
of business done within the state.
Holding Company
A company that owns a majority of the shares
of one or more corporations. A holding company is not engaged
in any business other than the ownership of shares.
Incorporators
The person or persons who execute the articles
of incorporation.
Indemnification
The practice by which corporations pay expenses
of officers or directors who are named as defendants in litigation
relating to corporate affairs. Note that directors and officers
may also be paid for the expenses they incurred in the process
of forming the corporation.
Investment Bankers
Commercial organizations involved in the
business of handling the distribution of new issues of securities.
Issued Shares
Shares a corporation has actually issued
and not cancelled.
Interest
An owner of a Limited Liability Company
is represented by interests. Analogous to the shares of a
corporation.
Leverage
Refers to the advantages that may accrue
to a business through the use of debt obtained from third
persons in lieu of contributed capital.
Limited Liability Company
An unincorporated business form that provides
limited liability for its owners and may be taxed as a partnership.
To create an LLC, a certificate must be filed with a state
official. Unlike C corporations, the earnings of LLCs are
not subject to double taxation.
Manager
An ownership option for a Limited Liability
Company is to have the LLC be operated by a group of managers.
The actions of the managers are very similar to the board
of directors of a corporation. In order for an LLC to be controlled
by managers, this fact must be noted in the articles of organization.
Member
A person who is an owner of a Limited Liability
Company. Note that the business decisions are made by the
members unless managers have been appointed in the articles
of organization.
Merger
An amalgamation of two corporations pursuant
to statutory provision in which one of the corporations survives
and the other disappears.
Minutes
A written record of the events of a corporation,
typically including all of the events taking place at both
shareholders’ meetings and board of directors’
meetings. These records are usually kept in the corporations’
record book.
Name Reservation
The name of a corporation or a Limited Liability
Company must be different from those previously on the records
of the government of the state of incorporation. A name can
usually be reserved for 120 days with the proper fee.
Net Worth
The amount by which assets exceed liabilities.
No Par Shares
Shares issued under a traditional par value
statute that are stated to have no par value. Such shares
may be issued for consideration designated by the board of
directors. Note that the value of no par shares is determined
by the state for franchise tax purposes and may result in
higher franchise taxes in comparison with low par-value stock.
Officers
People appointed by the directors to manage
the daily affairs of a corporation. The officers usually consist
of a president, vice-president, treasurer, and secretary.
Operating Agreement
An agreement among the members of a Limited
Liability Company which governs the LLC’s operations
and the rights of its members (analogous to a corporation’s
bylaws).
Organizational Meeting
The initial meeting at which the formation
of the corporation is completed. At this meeting, 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
is passed.
Paid in Capital
Some states require corporations to have
a specified amount of paid in capital (money) prior to the
commencement of business. CT, DC, SD, and TX are among these
states, and require a company to have $1,000 in paid in capital
before starting business.
Par Value
An arbitrary or nominal value assigned to
each share of stock. Stock must be sold for at least this
value.
Pass-Through Taxation
A taxation situation where the business
entity is not taxed and tax is only paid at the shareholder
or interest holder level. Note that S corporations and Limited
Liability Companies are pass-through taxation entities.
Piercing the Corporate Veil
Corporate formalities such as record keeping
and regular meetings must be followed or the corporate entity
will not protect shareholders from corporate debt.
Preemptive Rights
These give an existing shareholder the opportunity
to purchase or subscribe for a proportionate part of a new
issue of shares before it is offered to other persons. The
purpose of these rights is to protect shareholders from dilution
of value and control when new shares are issued. These rights
may be limited or denied.
Preferred Shares
Shares that have preferential rights to
dividends or to amounts distributable on liquidation, or both,
ahead of common shareholders. Preferred shares are usually
entitled only to receive specified limited amounts as dividends
or on liquidation.
Price-Earnings Ratio
The ratio of earnings per share to current
stock price.
Promoters
Persons who develop or take the initiative
in founding or organizing a business venture. Where more than
one promoter is involved in a venture, they are described
as co-promoters.
Professional Corporation
A corporation organized for the purpose
of engaging in a profession such as law, medicine, or engineering.
Professional corporations must file articles of incorporation
with the state which meet its requirements for a professional
corporation.
Proxy
A person authorized to vote someone else’s
shares. It may also refer to the document granting authorization
to vote someone else’s shares.
Quorum
The minimum participation required to conduct
business at a particular meeting. Usually a quorum is achieved
by a meeting of the majority of the directors or a meeting
with the majority of outstanding shares represented. Note
that the percentage needed for quorum may be modified in the
bylaws.
Registered Agent
The agent named in the articles of incorporation
to receive service of process on the corporation or other
important documents. This agent must be named in the articles
of incorporation.
Registered Office
The office named in the articles of incorporation
located where the registered agent is located. Note that this
need not be the principle office or place of business of the
corporation.
Resolution
A formal decision of a corporation adopted
by either the directors or the shareholders.
Retained Earnings
Net profits accumulated by a corporation
after payment of dividends.
S Corporation
A corporation that has elected to be taxed
under Subchapter S. The taxable income of an S corporation
is not subject to tax at the corporate level, but is allocated
to the shareholders to be taxed at that level. S corporation
is similar, but not identical, to partnership taxation.
Securities
A general term that covers a variety of
interests, including shares of stock, bonds, debentures, and
other forms of interest.
Share
An interest in a corporation.
Shareholder
Any holder or owner of one or more shares
in a corporation as evidenced by a stock certificate.
Sole Proprietorship
A business carried on with an individual
both as owner and conductor of business. The owner of a sole
proprietorship is liable for all business debts.
Stated Capital
The basic capital of a corporation. Technically,
it consists of the sum of the par value of all issued shares
plus the consideration for no par value shares to the extent
not transferred to capital surplus plus other amounts that
may be transferred from other accounts.
Stock
An equity ownership interest in a corporation
as demonstrated by stock certificates.
Stock Certificate
A written document showing ownership of
shares in a corporation.
Stockholder
See shareholder.
Stock Transfer Book
A book where all the owners of shares of
stock in a corporation are listed.
Subchapter S
Refers to the subchapter of the Internal
Revenue Code of 1954 that regulates the S corporation. See
also S corporation.
Subscribers
Persons who agree to invest in a corporation
by purchasing shares of stock.
Subscription
An offer to buy a specified number of theretofore
unissued shares of a corporation.
Surplus
A general term in corporate accounting that
usually refers to either the excess of assets over liabilities
or that amount further reduced by the stated capital represented
by issued shares.
Thin Corporation
A corporation with an excessive amount of
debt in its capitalization. Primarily a tax concept.
Treasury Shares
Shares that were once issued and outstanding,
but which have been reacquired by the corporation and "held
in its treasury."
Ultra Vires
The common law doctrine relating to the
effect of corporate acts that exceed the powers or the stated
purposes of a corporation. Traditionally, if a corporation
acted beyond its stated purposes, the actions were unenforceable
against the corporation. However, the legal strength of this
doctrine has greatly diminished.
Unanimous Written Consent
Most states allow directors to act without
a formal meeting if they all give consent to specific corporate
actions in writing.
Watered Shares
Par value shares issued for property which
has been overvalued and is not worth the aggregate par value
of the issued shares
|
