ENTITY-PEDIA

NOTHING FANCY...JUST THE FACTS

Amendment – A document filed with the state that makes official changes to a company’s initial formation documents (name change, increase number of shares, etc.).

Annual Meeting – A required yearly meeting where the shareholders of a corporation get together to elect or re-elect directors, review and discuss the financial statements and operating performance from the past year, and discuss plans for the coming year and any other necessary business.

Annual Report – A filing that updates a company’s information so it’s current on the state’s records. An annual report is required in most states for most corporations and LLCs, and while they are most commonly due annually, in some states they may only be required every other year. May also be called Statement of Information, periodic filing, or biennial report.

Articles of Incorporation – The state document that is filed to legally create a corporation. It may also be referred to as a Certificate of Incorporation or charter.

Articles of Organization – The state document that is filed to legally create a Limited Liability Company (LLC). It may also be referred to as a Certificate of Organization or charter.

Authorized Shares – The maximum amount of shares a corporation is authorized to sell. Corporations generally get to decide whatever number of authorized shares they wish to have, and must specify that amount in their articles of incorporation. Some states base their incorporation fees or corporate taxes on the number of authorized shares, so it may be best to choose a moderate amount to begin with. An amendment can be filed at any time if authorized shares ever need to be increased.

Business Entity – The form or structure of a business, such as corporations, LLCs, and sole proprietorships, etc.

Business License – An approval or permit issued by a federal, state, county, or municipal government agency that allows a business to legally operate within their jurisdiction. Business license requirements are affected by things like business industry, location, services and/or products sold, and number of employees.

Buy-Sell Agreement – A crucial agreement between co-owners of a business that states when, how, and to whom their ownership of the business may be sold. Having this agreement in place can protect the existence of the company in the event that an owner dies, goes bankrupt, leaves the business for any reason, or in some states, even if they get divorced. May also be called a buyout agreement, a business will, or a business prenup.

Bylaws – The internal rules a corporation makes to dictate how it will be managed. Bylaws vary based on each corporation’s needs, but often include things like guidelines for the election of officers and directors, what their duties will be, when and where required shareholder meetings will be held, and how stock will be issued. Bylaws are a required part of corporate compliance, so they are usually kept in the compliance kit with the other important company documents.

Certificate of Good Standing – An official state document certifying that a business exists and has met state requirements to be authorized to conduct business in that state, meaning they are in “good standing.” May also be called a Certificate of Existence, Certificate of Status, or Certificate of Fact.

Compliance Kit – A file or binder that holds all of a company’s important legal documents, such as formation documents, bylaws or operating agreements, meeting minutes, and stock or membership certificates. An important tool in helping maintain corporate formalities. Also called a corporate kit, LLC kit, or minute book.

Corporate Veil (Corporate Shield) – The concept that certain companies, like corporations and LLCs, are separate legal entities from their owners. This separation gives the owners protection from personal liability caused by the company's actions, debts, or obligations—though it’s important to note that this protection has limits (see Piercing the Corporate Veil).

Directors – People elected by the shareholders to make the big-picture decisions for a corporation. One person may act as the sole director and shareholder of a corporation. When a corporation has multiple directors, they function together as a board of directors, jointly overseeing the activities of the corporation.

Dissolution (Involuntary) – When a business is forced to cease operations against its will. In some states, a corporation or LLC may have its right to conduct business terminated for failure to meet state requirements, such as timely annual report filings, paying fees or taxes, or having a registered agent on file. In order to resume business operations, new articles of incorporation/organization will need to be filed. Also called an administrative dissolution.

Dissolution (Voluntary) – When a business chooses to cease operations. To legally dissolve, the business must also file any necessary dissolution documents with the state and meet any other state requirements for dissolution.

Dividend – Optional payment of profit by a corporation to its shareholders. Instead of paying dividends, corporations may choose to re-invest the profit to help fund further company growth.

Domestic Entity – A business entity, such as a corporation or LLC, is considered a domestic entity in whichever state they initially file their formation documents.

Double Taxation – Corporations are taxed on their profits. If those profits are distributed to shareholders as dividends, the shareholders will pay personal income taxes on that income, resulting in the same income being taxed twice. This is also called corporate taxation.

Fictitious Business Name (FBN) – A name used by a business that is different from its official legal name. State laws for using and obtaining an FBN vary widely, and in many cases, registration of the name must be handled at a county level. In some states, the FBN will need to be periodically re-registered to remain valid, with timelines varying between 2-10 years. Also known as a trade name, assumed name, or DBA (“doing business as”).

Foreign Entity – When a company is given authorization to conduct business in a state other than the one in which it originally incorporated, the new state will consider them to be a foreign entity.

Incorporator – The person who signs the articles of incorporation, forming a new corporation.

Initial Meeting (Corporate) – The required first meeting of a corporation’s shareholders after the articles of incorporation are filed. Topics may include issuing stock, making resolutions, and reviewing and adopting the bylaws.

Initial Meeting (LLC) – The first meeting of an LLC’s members after the articles of organization are filed. Topics may include appointing managers and defining their roles and salaries (in manager-managed LLCs), making resolutions, and reviewing and adopting the operating agreement.

Limited Liability – When a business owner is not personally responsible for the debts and obligations of their business (see Corporate Veil).

Manager-Managed LLC – An LLC where the members appoint one or more managers to manage the day-to-day operations of the business instead of doing it themselves. Managers may also be members (called managing-members) or they may be hired from outside the LLC.

Meeting Minutes – Written notes of what happened during initial/organizational and annual meetings. Meeting minutes are required for corporations and recommended for LLCs. They generally outline the meeting attendees, issues that were discussed, the decisions that were made, and when the next meeting will be held. Minutes are usually kept in the compliance kit with the other important company documents.

Member – An owner of a Limited Liability Company (LLC).

Member-Managed LLC – An LLC where every member shares in the responsibility of managing the day-to-day operations of the business.

Merger – Combining two or more business entities into one remaining business entity.

Officers – People appointed by a corporation’s directors to be responsible for managing day-to-day operations. Officer titles include, CEO, president, secretary, and treasurer. In many small businesses, the same person may serve as the corporation’s sole director, officer, and shareholder.

Operating Agreement – A written contract between an LLC’s owners—or a statement of declaration for a single-member LLC—detailing the structure, management and operating procedures of the LLC, including ownership percentages, members’ rights and responsibilities, a succession plan, how decisions will be made, and more. While not every state requires an LLC to have an operating agreement, it is highly recommended that every LLC have one. Without it, disputes will be settled by the court using the state’s default laws, which may not be in the best interest of the LLC's member/s. An operating agreement also creates even more distance between the LLC and its owners, which strengthens the owners limited liability protection. The operating agreement is usually kept in the compliance kit with the other important company documents.

Organizer – The person who signs the articles of organization, forming a new Limited Liability Company (LLC).

Par Value – The lowest amount for which a share of a corporation’s stock can be sold. A corporation sets its own par value when filing its articles of incorporation. Most corporations have no par value or one that is very low. The par value can be changed anytime by filing an amendment.

Pass-Through Taxation – When the profits and losses of certain business entities are “passed-through” the business to its owner’s personal tax returns instead of on a separate business return. Entities with pass-through taxation include sole proprietorships, S corporations, and LLCs—though LLCs may elect with the IRS to be taxed as a corporation instead (see Double Taxation).

Piercing the Corporate Veil – When a court waives limited liability and holds the owners and/or directors personally liable for the company's obligations. Courts prefer not to pierce the corporate veil, but will do so in cases of willful or serious misconduct including fraud, gross undercapitalization, or failure to maintain a formal legal separation between the company and the owners (such as co-mingling private and company finances or failing to maintain corporate formalities). Owners of smaller corporations and LLCs are at greater risk, as they are less likely to maintain strict corporate and financial formalities to separate their business from themselves.

Private Corporation – Any corporation with shares that aren’t publicly traded on a stock exchange, such as the New York Stock Exchange or the NASDAQ. May also be called a privately-held corporation.

Public Corporation – A corporation that has chosen to trade its shares publicly on the open market through stock exchanges, such as the New York Stock Exchange or the NASDAQ. In addition to disclosing corporate financial statements to shareholders, public corporations must comply with strict financial reporting requirements with the U.S. Securities and Exchange Commission.

Registered Agent – An individual or entity appointed to receive service of process on behalf of a business. Corporations and LLCs in every state are required to have a registered agent on file. Failing to maintain an active registered agent with a valid address may result in penalties, suspension, and even involuntary dissolution.

Service of Process – Delivery of official court documents notifying a person or business that they’re a party in a legal action, such as a lawsuit or court summons.

Shareholder – An owner of a corporation. Any person or entity that owns at least one share of stock in a corporation is considered a shareholder.

Shares of Stock – Stock represents the ownership in a corporation, which is broken down further into shares. Each share of stock represents a fraction of the ownership of a corporation in relation to how many shares the corporation is authorized to issue. For example, owning ten shares of stock for a corporation with 100 authorized shares equals 10% ownership.

Suspension – In some states, a corporation or LLC may have its right to conduct business suspended due to failure to meet state requirements, such as timely annual report filings, paying fees or taxes, or having an active registered agent on file. To get back into good standing, the company will need to resolve any delinquent fees or filings, and may also need to pay penalties or meet other requirements as determined by their state. In some states, the company may also lose the exclusive right to use their name, so if another business registers the name before good standing is reinstated, a new business name will need to be chosen.

Sole Proprietorship – The most common and basic type of business, a sole proprietorship is simply a single person operating an unincorporated business. There is no legal separation between the owner and the business, so the owner has unlimited personal liability for all of the business’s debts or obligations. A sole proprietorship may do business under the owner’s name or it may obtain a fictitious business name.

Undercapitalization – When a business has insufficient funds (capital) to support its operations. Undercapitalization is one of the main causes of business startup failure, and worse, if a court determines that a company knowingly or recklessly took on financial obligations with a creditor without sufficient capital, the corporate veil may be pierced, leaving the company’s principals personally liable for the business’s debts.

Unlimited Liability – When a business owner is personally responsible for the business’s debts and obligations beyond the investment they’ve made in the company, putting their personal assets (car, home, etc.) at risk. Owners of businesses like corporations and LLCs only have to worry about this if they lose their limited liability protection, but some businesses, such as sole proprietorships, have unlimited liability by default.

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