Glossary of Terms

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 pre-incorporation 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.