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By Milt Wright and Anita Lee Wright
Milt Wright & Associates

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
A 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.

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.

Articles of Incorporation
(Certificate of incorporation or charter). The articles are the primary legal document of a corporation; they serve as a corporation’s constitution. The articles are filed with the state government to begin corporate existence. The articles contain basic information on the corporation as required by state law.

Articles of Organization
LLCs must file the articles with the proper state authorities to begin existence. The articles of organization are very similar to a corporation’s articles of incorporation.

Asset
Anything owned that has monetary value.

Assumed Name
A name under which a corporation conducts business which is not the legal name of the corporation as shown in its articles of incorporation. If a corporation does business under an assumed name, it may be required to file registration of the assumed name with the state.

Authorized Shares
The total number of shares a corporation is authorized to sell. This number is specified in the articles of incorporation. All of the shares authorized need not be issued.

Authorized Stock
The total amount of stock that a corporation is authorized to issue. The amount of authorized stock is usually contained in the Articles of Incorporation.

Business Judgment Rule
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.

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.

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.

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.

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

Dissolution
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.

Dividend
A distribution of money or property paid by the corporation to a shareholder. These distributions are subject to a double tax, both the corporation and the dividend recipient must pay federal taxes on these earnings.

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.

Equity
The ownership of a shareholder in a corporation.

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

Federal Tax Identification Number
A number given 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.

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 conducts business in a state other than where it was 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 in the corporate or LLC form 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.

Holding Company
A corporation that has no other function except owning other corporations.

Incorporator
The person or entity that prepares and files the articles of incorporation. Business Filings Inc. acts as an incorporator for many new companies.

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.

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.

Limited Liability Company
A business entity formed upon filing articles of organization with the proper state authorities and paying all fees. LLCs are a new entity in the United States, although the concept has long been used internationally. LLCs generally provide limited liability to their members, and are taxed like a partnership, preventing double taxation. LLCs can be formed in every state.

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

Member
A member is a person 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 be controlled by a manager or managers.

Merger
Merger occurs when one corporation is taken over by another.

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.

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.

Not-For-Profit Corporation
A corporation organized for some charitable, civil or other social purpose which does not entail the generation of profits for shareholders. These corporations receive special tax treatment. Not-for-profit corporations must file not-for-profit articles of incorporation with the state.

S Corporation
A corporation which elects subchapter S tax treatment. This tax treatment allows the corporation to avoid entity level taxation.
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 carried on by the owner as an individual. The owner of a sole proprietorship is personally and fully liable for all business debts; thus, personal property could be taken to pay business debts.

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.

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

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.

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