“Delaware Loophole”
This refers to Delaware not taxing intangible property, such as leases, royalties, and patents. The “Delaware Loophole” is one of the reasons many holding companies are formed in Delaware.
Addendum
A signed modification or addition to an agreement appended at the end of an agreement either when the agreement is signed or at a later time.
Alter Ego Liability
Alter ego liability is a legal term used offensively by a creditor to a company who is attempting to pursue the assets of the owner-operator of a business. It is a claim that the manner in which the company has been operating is without recognition of a distinction between the owner and the business: the business is just an extension of the individual or his “alter ego.” This is a legal sword to piece the protective layer between the business and the person to allow the business creditor to extend his claim from not only the business assets, but also to the owner’s personal assets. For example, when few corporate formalities are not followed, such as documenting transactions, keeping separate records and accounts, the injured party can claim that the company was just an extension of its owner and that the line between the person and the business was so blurred as to make the creditor believe he was dealing with the individual not operating as a business entity. This is an easier case to make in the corporate context. In the context of an LLC, there are fewer required formalities and therefore fewer “rules” that need to be followed. Nevertheless, it is a good idea to keep contracts in the proper name of the business, whether it is an LLC or a corporation. Delaware is one state that does not favor this method of attack. It is a very difficult claim for a creditor to make in Delaware. However, other states, with less developed laws and less sophisticated judges may be more prone to entertain this offensive attack on the company and its owner, resulting in a “thinner” bullet proof jacket in states other than Delaware. Avoiding alter ego liability it another reason to incorporate in Delaware, to get the “thicker” bullet proof jacket.
Amendment
- A modification signed by the parties to an earlier Agreement so as to add, delete, and/or revise terms or conditions of the earlier Agreement.
- In the context of a document on file with the Secretary of State, an amendment can be filed to change the name of the company, the Registered Agent for the company, the stock authorized by a corporation or any other provision in the Certificate of Incorporation or Certificate of Formation for an LLC.
Annual Meeting
1. A required meeting of the stockholders of a corporation that must happen every year (or technically every 13 months under Delaware law). It is also possible to avoid this meeting in a corporation if there is a unanimous action in writing signed by all shareholders of the agreed upon actions, such as election of directors.
2. An annual meeting of directors, where officers are elected and their salary and bonuses are agreed upon. Typically, these meetings should be documented by the corporate secretary who will insert annual meeting minutes into the corporate minute book. These are usually still kept in paper form. Even in a corporation where the stockholder is also the sole director and sole officer, the annual meeting is required.
3. It should be noted that the annual meeting is different from the “annual report” that is filed with the Secretary of State listing the names of the corporation’s directors.
Annual Report
A corporation’s one-page online filing due once per year to inform the Secretary of State of the names of all of the directors and at least one officer. Required with this report is also a payment of a “franchise tax”. One must file the annual report with the Division of Corporations online, which collects the franchise tax and maintains the Good Standing status of the corporation. Currently, Delaware does not require LLCs to file Annual Reports, although many other states do. The Annual Report in Delaware must be completed online and must list all directors of a corporation as of the time of filing. The Registered Agent’s address should not be listed as the principal place of business on the annual report. Failing to file this report and pay the franchise tax/fee will result in the corporate charter being revoked administratively by the Secretary of State and thereby lose the privilege and protections afforded to corporations.
Apostille
An official certificate, issued by the Secretary of State, to certify that documents on file with the Secretary of State that are required by certain countries which accept the terms of the Hague Convention’s international treaty. For example, to do business in Spain, rather than have a certified copy of the Delaware LLC’s Certificate of Formation legalized by filing a certified copy with the U.S. Department of State and that Spain’s consulate, the treaty empowers Delaware to issue the document directly, which saves time and money and does not require separate approval from the U.S. Government. Fewer than half of all countries have ratified the Hague treaty on this. Therefore, many countries require the more formal and longer process of legalization. We help international customers obtain apostilled documents and legalized documents for use overseas.
Appraisal Remedy
A right of shareholders who disagree with a merger to have their shares objectively valued and repurchased by the corporation at Delaware fair value, which may be different than fair market value. A petition must be filed in the Court of Chancery to obtain this remedy.
Articles of Formation
A document required by law to be filed with the registration of a limited liability company (LLC) (including the name and address of its Registered Agent). Necessary provisions vary among states. Many states require this document to be signed by a manager or managing member. (Sometimes referred to as the “Articles of Organization” or a “Certificate of Formation”, depending on the state involved).
The Certificate of Formation is the document that creates the LLC and lists where the Registered Agent can be contacted. This short document is usually kept in company files and in the files of each member. All of IncNow‘s LLC packages include the Certificate of Formation, as it is the one essential document that must be filed with the state.
Articles of Incorporation
A corporation’s charter that evidences the corporation’s existence. It is a birth certificate that documents the state of incorporation and the name of the corporation. The Articles of Incorporation must conform to state law minimum requirements, and must be filed with the state where the corporation is formed. Additionally, the Articles of Incorporation often state the purpose of a particular corporation, the name of the corporation, the Registered Agent’s name and address, and details involving stock types and amounts that are to be authorized. (Sometimes referred to as a “Certificate of Incorporation”, depending on the state involved)
Articles of Organization
The document that is required in many states (including Florida and Nevada) to be filed in order to form a limited liability company (LLC) (including the name and address of its Registered Agent). The Articles of Organization are prepared by the incorporation service and follow a state form to meet the state’s minimum filing requirements. This document is signed by an authorized person, usually who works for the incorporation service. After the scanned or faxed copy of the Articles of Organization is submitted and the filing fee paid, the state of formation enters the document into an official database of LLCs and lists it on their website as having been chartered. The Evidence of Filing is then returned to the incorporator which in turn sends it to the customer with a copy letter. If the customer orders the Operating Agreement as well, it is also sent to the Customer. In addition to the Articles of Organization, every LLC should have an LLC Operating Agreement to state the members names who own the company and how the LLC is to operate. (Some states use the term Certificate of Formation rather than Articles of Organization).
Asset Protection Trust
A legal agreement where a wealthy person (grantor) sets aside money, in the name of a Delaware Trustee, for the grantor’s future benefit, to protect the grantor’s personal assets from the grantor’s unforeseeable future creditors. By comparison, an LLC is sometimes referred to as a “poor man’s asset protection trust” because an LLC is not an effective method to protect personal assets from personal creditors. Historically, one could not use a self-settled asset protection trust for which the grantor is the beneficiary to avoid creditors, until the advent of new laws about fifteen years ago. There are numerous requirements for this to avoid defrauding creditors, and not all states have them. Delaware is one of the most favored states for these types of asset protection trusts. The trust must be set up for four years before the assets in them are protected from any types of creditors. The grantor must not have creditors with foreseeable claims and should not put more than one-third of his or her assets into this trust. In exchange, the grantor gives up a good deal of control to a third party trustee, who would need to be in Delaware. Usually, these are funded with cash and not real estate, although sometimes they are funded with Delaware LLC interests in other assets. Usually, these trusts contain at least three hundred thousand dollars to justify the administration and start-up costs.
Assignee
1. A person or entity to whom some property or privilege is signed over.
2. A person who is appointed to act for another. In the context of an LLC, it is one who receives an interest in the LLC with economic rights, but not voting rights, unless the intent was also to give the assignee voting rights. By comparison, to give away voting and economic rights together, is a transfer with a transferee and a transferor.
Benefits Corporation (B-Corp) (see also Public Benefits Corporation)
A corporation permitted to have other “public interest” purposes set out in its charter to also provide for specific alternate purpose instead of primarily maximizing profit for stockholders. In a traditional General Corporation, the duty of the directors is to maximize profits and value for the stockholders. Many people have heard of companies that give away two pairs of eye glasses for each pair they sell or give away a free pair of shoes to children in third world countries for each pair they sell. Typically, this type of activity could result in a lawsuit by the stockholders against the management for wasting corporate assets. However, in a public benefit corporation, that type of activity is expected and required. In Delaware, a public benefit corporation must set out in its Certificate of Incorporation that it is a public benefit corporation and provide a specific public benefit, which is reviewed and approved by the Delaware Secretary of State. Most other states that have public benefit corporation laws do not require a specific benefit to be listed. Without being filed as a public benefits corporation, you may become “certified” as a B-Corps by an organization located in Pennsylvania called B-Lab. Sometimes certified B-Corps are allowed special tax benefits or are open to investors who are interested in doing something for the public good.
Breach
Violation of a legal obligation, such as a duty under contract or a fiduciary duty.
Business Judgment Rule (BJR)
A legal doctrine in Delaware that immunizes management from subsequent attack from owners for actions taken on behalf of a business. It is applicable when the actions of management were in good faith and satisfy the duty of care and were not self-dealing transactions. For self-dealing transactions, the manager is subject to an entire fairness standard and not protected by the Business Judgment Rule. This rule is particularly strong in Delaware and allows management much comfort to take business risks and make decisions which could result in losses to the company. Encouraging this type of risk taking, allows businesses to engage in high risk, high reward behavior. It also encourages management to not be overly risk averse. The net result is more value in the long run to owners, which is one reason why companies incorporated in Delaware on average have higher valuation multiples than peers incorporated in other states. This rule allows business managers to sleep at night without the constant threat of attack by activist shareholders or members.
Buy-Sell Agreement
Provision in company agreements that mandates a purchase and sale of an interest after a triggering event. For example, a clause that sells shares back to a company or stockholders on the owner’s death. LLC Operating Agreements often contain this language. However corporate Bylaws and minutes do not contain this information. To obtain these buy-sell rights, stockholders should enter into a shareholder agreement, which can be ordered separately.
Bylaws
The internal procedures for how to run a corporation that provide for the proper conduct of corporate meetings, elections, and officers’ authority to take business actions. State corporation statutes require that every corporation adopt Bylaws (a document not filed with the Division of Corporations in the state of incorporation). Bylaws are not applicable to an LLC because the equivalent is the LLC’s Operating Agreement. The Operating Agreement goes one step further and acts as a partnership agreement between owners. That is not in the Bylaws. To have an agreement among owners, the stockholders would enter into a shareholder agreement, a separate document that is recommended.
C-Corporation
The default tax status of all corporations, which requires filing the “Form 1120” tax return to report its income on a calendar or fiscal year basis. An LLC may elect to be taxed as a C-Corporation by filing a Form 8832. A C-Corporation may carry its losses forward from one tax year to the next. People often think of the C-Corporation as being subject to “double taxation” which is true. However, even with double taxation, there are many options to reduce one’s taxes. This information can be founder under “tax tips” on our website.
Capital Contribution
The cash or property contributed to a company by its owners.
Certificate of Amendment
A document filed with the Secretary of State amending the Certificate of Incorporation or Certificate of Formation to add or change the provisions therein.
Certificate of Authority
A document issued by a particular state to a foreign corporation which grants the corporation the right to do business in that state.
Certificate of Cancellation
A document filed upon the dissolution of an LLC.
Certificate of Formation
A document filed with the Secretary of State to create a limited liability company (LLC). In Delaware, the Certificate of Formation usually only contains the name of the LLC, name of the organizer, and the name and address of the Registered Agent. This is the grant of authority by the state government to bring the LLC into existence, like a birth certificate. (Sometime referred to as the “Articles of Formation” or the “Articles of Organization”, depending on the state involved)
Certificate of Good Standing (Certificate of Status)
A document, issued by the state, that proves a company exists and all Secretary of State fees have been paid, which authorizes it to do business in that state as of the date issued. These are sometimes required by banks before accounts are opened or before loans are taken out.
Certificate of Incorporation
A document (often one-page) filed with the Secretary of State that sets forth the corporation’s name, Registered Agent, authorized stock, and certain other information which is required or permissible to be included according to the Delaware General Corporation Law. This is the “charter” for the corporation; the corporation is formed as of the time this document is date-stamped received.
Certificate of Validation
Under Delaware law, a Certificate of Validation is filed with the Secretary of State to ratify a defective corporate act, such as issuing unauthorized stock.
Certified Copy of Filings
A copy of a company’s official corporate filing document(s) or charter and all amendments thereto. This copy is signed and certified by the person(s) who hold official custody of the original documents, such as the Secretary of State.
Charging Order
When a member of an LLC incurs personal debts, the creditor who wins a judgment often tries to collect the judgment. If the debtor is a member of an LLC, often that creditor wants to seize that asset as he is looking to get repaid. However, the creditor is out of luck when it comes to seizing the debtor’s membership interest. Instead of being able to either (1) conduct a hostile take-over and operate the debtor’s LLC or (2) sell the debtor’s membership interest to someone who might want to be a member, the creditor gets only a “non-Voting interest” and right to collect dividends, if the LLC decides to issue dividends. This is a very weak and undesirable remedy for the judgment creditor. This provides the debtor the ability to continue to operate the LLC with virtual impunity. This does not give the creditor an ownership interest and it terminates once the amount owed is paid in full at which time the debtor gets his interest back from the creditor, releasing the charging order. This protection is not afforded to corporate stockholders. This is one significant advantage in the LLC over the corporate form. The attempt of a creditor to drill down and collect the assets of the LLC is sometimes referred to as a “reverse-pierce”: a reference to the corporate veil used to protect owners from business liability, may also be implemented in reverse in the case of an LLC.
Classified Board of Directors
A Board of Directors that is split into different classes, such as directors with different terms of office. This can be a defensive tactic to prevent stockholders from changing the corporate directors too quickly because the new directors are elected periodically, such as a rotating board with 1/3 of the directors every three years.
Close Corporation
A type of corporation operated by its stockholders, not needing to have directors. Close corporations went out of fashion with the advent of the limited liability company.
Closely Held Corporation
A closely held corporation simply means that the stock is not publicly traded. This is the case in almost all private corporations.
Committee (of the Board of Directors)
A subset of the Board of Directors established in the Bylaws that focuses on a specific subject, such as an executive committee, corporate governance committee, or executive compensation committee.
Common Stock
Common stock is voting shares issued by a corporation. This is the typical definition of “stock”, and the shares issued by the Certificate of Incorporation are, by default, common stock. Most corporations only have one class of stock and this is common stock. The alternative is preferred stock.
Conversion
A conversion is when a corporation changes to an LLC, or an LLC changes to a corporation. This is done by filing certain documents (Certificate of Conversion or Articles of Conversion) with the state, depending on the state and which business entity is being converted to. A Certificate of Conversion is often used like a short-form merger. Historically the out of state entity would have to form a new company in the state it wanted to move its domicile and then convert into it. Reincorporating and transferring assets would not work because that would result in a new entity and the history would be lost. A conversion preserves the ongoing operations. If leaving a state and moving a corporate domicile to Delaware to take advantage of the laws in Delaware, it is also important to file a document with the first state of incorporation to let them know the company has moved and to where it has moved and the new name of the company. If a company moves its domicile from one country to anther it is called a domestication.
Copyright
A U.S. Copyright is a form of intellectual property that protects original authorship of tangible forms of expression, such as music, books, artwork, and computer software for a limited duration. Copyright exists the moment a work is created, although original works can be registered with the United States Copyright Office, part of the Library of Congress, to shift the burden of proof to the infringing party, should a copyright violation arise.
Corporate Kit
A 3 ring, slip-cover vinyl binder that holds materials with regards to the corporate governance history of a corporation or LLC. Such documents can include, but are not limited to: company Minutes, Bylaws, Corporate Seal, stock certificates, and stock record.
Corporate Resolution
A formalized statement that has been voted upon by the corporate directors and/or stockholders at a meeting or by unanimous written consent outside a meeting, typically authorizing a specific corporate action. These typically have recitals of background facts to explain the context for the decision followed by “it is hereby resolved that …” after the resolutions, which continue with “further resolved that…” the corporate secretary attests to this written record and should keep a copy in the corporate minute book.
Corporate Seal
A hand-held “raised seal” that is used to imprint or emboss the corporate name, the year of formation and the state of formation. Although, this stamp is no longer required by law, many corporations choose to still use this, and can provide a Corporate Seal. Sometimes this is requested by banks or other parties to a contract.
Corporate Veil
The liability protection for LLCs and corporations, where individual owners are not personally liable to creditors of their business.
Corporation
A legal entity established by filing a Certificate of Incorporation. It is allowed to borrow money and enter into contracts separate and independent of its stockholders. Stockholders receive distributions and elect directors who run the company through officers (at-will employees) that conduct the day-to-day activities. The stockholders are protected by a “corporate veil” that prevents debts against the corporation from being enforced against individual stockholders in their capacity as stockholders; this is known as “Limited Liability”. The laws in the state of formation govern the internal affairs of the corporation. The rules governing corporations require certain formalities be followed so as to comply with local laws. These include annual meetings, among others.
Correction
A certificate filed with the Secretary of State to indicate that a mistake was made when an earlier document was filed. A Certificate of Correction cannot be backdated, but it does reference an earlier filed document. Many things can be “fixed” by a Certificate of Correction, for example the certificate setting forth the wrong amount of stock, the wrong name of the company, the wrong manager, or almost anything else previously filed as a Certificate of Formation/Incorporation or amendments thereto. This should be distinguished from a Certificate of Amendment, which can “fix things” from that point forward, but a Certificate of Amendment does not state the reason for the change was an earlier mistake.
Court of Chancery
A court which has jurisdiction over internal affairs for corporations related to equity and injunctive relief. Most business cases in Delaware are decided by this court, which has a reputation for fairness and competence unparalleled in the United States. Expedited remedies are available and none of the cases are subject to juries.
Creditor
A person or company to which a financial obligation is owed by a debtor. Creditors can be secured or unsecured by particular collateral. Creditors can take different priorities, and can include groups as diverse as a business’ employees, owners, vendors, lenders, third-party victims of accidents (tort creditors), customers, people who have one judgments in court (judgment creditors).
D.B.A. (“Doing Business As”)
Any name that is used by an individual sole proprietor, a corporation, LLC or partnership, which differs from the name that was registered with the Secretary of State. This is also known as a trade name or fictitious name and to file this document on public record provides public notice of this second alternate name.
D.C.I.S. (Delaware Corporation Imaging System)
The online MS-DOS based mainframe computer used to file and store Delaware corporate records with the Delaware Secretary of State. This system is soon to be replaced by “ICIS” a web-based system.
Debtor
A person or company that owes a financial obligation to one or more creditors. Often this is to repay money or to pay for breaches of an obligation. A judgment debtor is one who a court has ruled in favor of, who has a judgment lien on debtors’ assets. A debtor may also voluntarily secure the debt to a creditor by pledging collateral in the form of tangible or intangible property.
Deed of Trust
A mortgage or type of lien on real property (land and structures or “dirt, sticks, and bricks”) where legal title to the mortgaged property is transferred to a trustee until the mortgage is satisfied.
Delaware LLC Act (6 Del. C. 18-101 et seq.)
This Act is the law which governs LLCs in the State of Delaware. The internal affairs of an LLC formed in the State of Delaware are governed by the Act. Every LLC is required to have an LLC Operating Agreement – a private partnership agreement, usually in writing, signed by the members of an LLC – which often contracts around the default provisions in the Act (that governs in the absence of an agreement to the contrary).
Direct Hit Trademark Search
A trademark search of the U.S. Patent and Trademark official records and the records of all 50 states’ trademark databases. It does not include a “common law search” of telephone directories, but does include some “truncated versions” of the name searched so as to help locate confusingly similar names and not simply identical name filings.
Director
A director is a member of a Board of Directors that manages the affairs of a corporation. All Delaware corporations must have at least one director. The directors are elected by the stockholders and the directors appoint the officers. The directors must meet at least once per year.
Discovery
The pre-trial phase of a lawsuit in which each party can request and receive certain information from the other parties. This phase also allows for the usage of subpoenas, depositions, interrogatories (written questions), and requests for admissions.
Dissolution
The formal procedure to wind-down the operations of a corporation, LLC, or partnership.
Dissolve
To terminate/end the existence of a corporation, LLC, or partnership.
Dividends
Distributions of a company’s earnings to its owners/shareholders.
Division of Corporations
A division of the Delaware Secretary of State’s office that handles incorporation of business entities.
Domestication
The process by which a non-U.S. based company changes its domicile to Delaware so as to be governed under Delaware law. This is a two-step process: First form a new Delaware Corporation or LLC and second, merge the non-U.S. entity into the new Delaware entity. The domestication, sometimes called a domestication, preserves the continuity of the company. It also allows a foreign corporation to become a Delaware LLC, the preferred choice of entity for international business and asset holding. Should you wish to order a domestication whether it be for owning real estate in Spain and wanting that to be in a Delaware LLC rather than a Chanel Islands LLC or if you have a yacht in Turkey that you want incorporated under a Delaware LLC.
Double Taxation
The term used to describe the taxing of C-Corporation’s earnings at both the corporate level, and again to the shareholder personally when shareholder dividends are distributed. In practice few small business C-corporations pay double tax because most pay reasonable salaries that reduce the taxable income to less than $50,000, which is only a 15% tax rate. Then the funds are often borrowed out to avoid paying dividend taxes.
Duty of Care
The duty of care is one of the default fiduciary duties that anyone acting on behalf of a business owes to the business. This duty requires that the individual act in the way a reasonable person would when acting on behalf of the business.
Duty of Loyalty
The duty of loyalty is a default fiduciary duty that anyone acting on behalf of a corporation owes to the business. This duty requires that the individual’s actions taken on behalf of the business be in the business’s best interest, rather than personal interest. One cannot engage in self-dealing and if one does, it must be entirely fair and would not be protected by the business judgment rule.
E.I.N. (Employer Identification Number)
The Taxpayer ID # which is the corporate equivalent of a Social Security Number (SSN) for an individual. This number is assigned by the IRS to corporations and LLCs when requested by filing a Form SS-4. The EIN is used to open bank accounts in the United States and is 9 digits long.
Equity Court
See: “Court of Chancery”.
Fiduciary Duty
A fiduciary duty is a duty that anyone acting on behalf of a business owes to the business, including the stockholders. Breaches of this duty can result in liability for monetary damages, including lawsuits by shareholders or derivative claims (where an individual sues the business to make the business sue the individual who breached his duty). In an LLC, fiduciary duties can be heightened, reduced, or eliminated, which is unusual since in corporations this is not the case. This is another reason to consider the LLC as a form of business entity. Reducing or eliminating the fiduciary duty of managers and majority owners can provide more flexibility to run the business how they see fit.
Fiscal Year
The 12 month period, elected by owners of a C-Corporation, to coincide with their company’s business cycle (often other than the calendar year, e.g. September 1st to August 31st).
Foreign Qualification
The corporate filings of out-of-state corporations or LLCs that enable the company to do business in that particular state (i.e. a Delaware Corporation headquartered in California files a Certificate of Authority to qualify as a foreign company in California).
Form 1023
The IRS application form required to be filed by a non-profit corporation to obtain a tax-exempt determination (such as Section 501(c)(3)) letter from the IRS.
Form 2553
The one-page IRS tax election form which is filed to elect the S-Corporation status by a corporation or LLC within 75 days of the beginning of the calendar year or within 75 days of the business formation. Some states require a separate election. The company must have all individuals who are not existing as owners. It cannot have more than 100 owners. All owners must be U.S. citizens or permanent residents of the United States. S-Corporations file the 1120-S tax return for every year.
Form 8832
Form 8832 is the one-page IRS tax election form required to elect that an LLC be taxed as a C-Corporation. The form must be filed with the IRS within 75 days of formation to take immediate effect. Otherwise, the election will apply to the following tax year. The LLC would also obtain an Employer Identification Number (EIN) to include on Form 8832 if it had not already done so.
What Is the Benefit of a C Corporation?
C-Corporation is the default tax status of all corporations, which requires filing the Form 1120 tax return to report its income on a calendar or fiscal year basis. An LLC may elect to be taxed as a C-Corporation by filing a Form 8832. A C-Corporation may carry its losses forward from one tax year to the next. People often think of the C-corporation as being subject to “double taxation” which is true. However, even with double taxation, there are many options to reduce one’s taxes.
For tax years beginning after December 31, 2017, a permanent change was made to a flat tax rate of 21% on all taxable income of C-Corporations.
Once the corporate election is made, the LLC will be subject corporate taxation for a minimum of five years before a new election can be made.
Franchise Tax
An annual fee that a business pays to the State to maintain its Good Standing to do business. Failure to pay this franchise tax (and the associated filing fee), regardless of business activity or non-activity will result in the corporate charter being forfeited. This tax is not typically paid by accountants. Additionally, the franchise tax is not dependent on business activity. In the case of an LLC, the fee is fixed at $300 per year. In the case of a corporation, the amount of the tax is based on the stock authorized. A corporation with 1500 authorized shares only owes $125 per year ($75 franchise tax and $50 filing fee). For corporations with much authorized stock and little in assets, they are entitled to “recalculate” the tax on the asset method which can reduce the tax significantly. In the case of a non-profit corporation in Delaware, only the filing fee is due, not the associated franchise tax.
General Corporation
A for-profit corporation which has stockholders who elect directors, who in turn appoint officers. This can be an S-Corporation or a C-Corporation, but they all “start out” as C-Corporation, unless the form 2553 tax election is made.
General Partner
A general partner is an individual who manages an LP. In an LP, the General Partner is personally liable for business debts. To avoid personal liability, an entity like a corporation or LLC can be named as a General Partner. Passive partners are called Limited Partners.
Golden Parachute
Provision that gives substantial benefits to officers who are forced to leave the company through takeover or otherwise.
Good Faith
Good faith is a legal requirement of honesty that is present in negotiation, meaning that parties cannot purposely hide things from another party or attempt to deceive them.
Good Standing
A term used to describe an entity which has satisfied state corporate or LLC law requirements such as filing all the necessary reports and documents, having a Registered Agent, and being up-to-date with regards to all penalties and fees owed to the state.
Guarantor
An individual or entity that guarantees to pay a loan if the debtor defaults. Often used in real estate financing.
Hague Convention
A treaty signed by certain countries which simplifies the process of authenticating local documents for use in other countries. The state of incorporation can apostille certain documents directly without filing the documents with the national government. Non-signatory countries must authenticate through the U.S. Department of State and their local consulate in the United States. However, sometimes non-signatory countries accept the apostilled documents, even though they did not sign the treaty. This is sometimes the case in China, where most providences did not sign the Hague Convention, but may accept the apostilled documents, which can be obtained more quickly and cheaply than “legalized” documents.
Holding Company
An asset-holding company with a virtual office in the State of Delaware with the intent to create enough contacts to a geographic location to give the state jurisdiction over the assets in Delaware to avoid taxes in other locations where a company is doing business.
2. Sometimes a holding company is merely a reference to a company that holds passive assets, without conducting other business activities. For example, this is used often to separate active businesses from passive activities. For example, a restaurant that uses a holding company to own the building and a corporation to conduct its going concern activity. This can provide tax and asset protection benefits, to bifurcate ownership in this way.
Incorporator
The person who signs the Certificate of Incorporation before filing it with the Secretary of State. This is usually someone from the office of the incorporation service. While it is permissible to sign with a conformed signature, it is best to sign a wet-ink original to avoid any confusion about actual authority on the part of the incorporator. The incorporator then signs Minutes of the Initial Meeting of Incorporator to hand over authority to the initial corporate director or directors named on the order.
Indemnify (Indemnification)
To reimburse an officer, director, manager, etc. for costs associated with claims made or judgments obtained against them in the course of business. It can take the form of an advancement or a reimbursement. Usually, managers will expect this promise to indemnify to be made as part of an LLC agreement or bylaws for them to assume the risks associated with managing a business.
Initial Public Offering (IPO)
When a corporation sells shares of its stock to the general public on an exchange for the first time.
Injunction
A judge-issued remedy that orders a party to perform an act or stop performing an act. In the context of a corporate dispute typically it is an order to stop something from happening that may cause “irreparable harm”. An injunction can be ordered “ex parte” on an expedited basis by the Delaware Court of Chancery in the form of a temporary restraining order or with minimal notice in the form of a preliminary injunction. If after trial it is determined that the injunction should stand for longer periods, it may even take the form of a permanent injunction, for example, to block the sale of a company. This remedy is limited only to cases where money damages would not make the other party whole, so some unique property or interest must be at stake. “. Another example is to enforce a Non-Compete Agreement to order someone not to work for a competitor.
Intent-To-Use
Where the trademark applicant files a mark before he has used the mark in commerce, but with a bona-fide intent to use the mark in commerce within a certain timeframe after it has been approved for publication and prior to registration.
Internal Affairs Doctrine
A legal doctrine that the internal affairs of a corporation or LLC will be subject to the laws of the state of incorporation (and not the laws of the state where the business is being conducted). Internal affairs generally encompass corporate governance disputes generally between management and owners. This is why many businesses choose to incorporate in Delaware, to “opt-in” to Delaware law and simultaneously “opt-out” of their home state’s laws.
International Authentication
The process to legalize documents for international use in countries which are non-signatories of the Hague Convention. First, a certified copy is obtained from the Secretary of State. Next, this is delivered to the U.S. Department of State for certification of it being a legal document of the United States. Finally, this is delivered to the local consulate for the country where the document is to be legalized, so that local officials will recognize it as a legal document because it contains their countries authentication stamps and seals.
Limited Partner
A limited partner (to be distinguished from a general partner) is a passive investor in a limited partnership that is not permitted to engage in the management of the limited partnership and therefore that limited partner does not have personal liability for the obligations of the limited partnership.
LLC (Limited Liability Company)
A traditional LLC is established upon the filing of a Certificate of Formation with the Secretary of State. It is owned by one or more members and operated by one or more Managers or Managing-Members, as set out in an LLC Operating Agreement. The LLC is the most popular form of business entity. It has grown in popularity because it is superior to the corporation in that the LLC offers more asset protection, organizational structure flexibility, operational flexibility, and tax flexibility. It is also simple to set-up and operate with few formalities. It is well designed to hold passive assets like real estate and conduct active businesses. It is also well designed for everything from the one-man-shop to extremely large scale businesses. It is also flexible enough to be used for venture capital funding and joint ventures. Rather than having many default rules govern their operation and limitations, they can be crafted into an agreement where all the owners’ rights arise from the rights and obligations contained in the LLC Operating Agreement. The members are treated like professionals who are sophisticated and able to negotiate terms to protect their interests ahead of time. The member’s rights are all in the agreement, so owning a stock certificate (membership certificate) is not necessary. Most LLCs do not require annual meetings and have very few corporate formalities. Almost everyone is comfortable with this corporate form which is now in all fifty states. A newer form of LLC is called a series LLC, which allows for firewalls of liability protection within one entity.
LLC Units
LLC units represent ownership interests in an LLC. LLC members do not have “shares of stock”, but rather receive Units/Interests that collectively equal 100% ownership in the LLC. Units may be in different classes, such as Voting and non-Voting. LLC units have rights and privileges as determined by the Operating Agreement which often imposes restrictions on fee transfer and assignability. The advantage of these restrictions is it may make it easier to keep your business partner from selling his interests to your competitor. They often provide for a right of first refusal on the LLC to buy out the units in the case of certain trigger events, such as a member leaving the employment of the company or death. These restrictions on transfer can be helpful in the event of a problem to keep the company.
LLP (Limited Liability Partnership)
A LLP is a legal entity whose partners are 100% personally liable for his or her personal negligence, but not for acts of negligence committed by the other partners. It is created through the filing of a Certificate of Limited Liability Partnership. This is usually only used by professionals, like lawyers and doctors because historically they were not allowed to operate as corporations or limited liability companies for public policy reasons (the government did not want professionals using a corporate veil to hide from their personal negligence). The franchise tax paid is based on the number of partners, which is $200 per year per partner.
Low-profit Limited Liability Company (L3C)
A low-profit limited liability company is a business structure that is available in some jurisdictions (although not Delaware).Although the purpose may be altruistic, most believe these entities serve no practical purpose because a traditional LLC can set-up its operating agreement to provide for this structure without a separate entity type. The requirements and benefits of an L3C vary among states.
LP (Limited Partnership)
A legal entity which begins with the filing of a Certificate of Limited Partnership. It classifies partners into two types: operating partners called General Partners and passive investors called Limited Partners. An LP consists of one or more “general partners” who manage the company and are held liable for company debts and expenses, as well as one or more “limited partners” who are passive investors and not held liable for company debts and expenses.
Manager
Manager-managed refers to an LLC that has one or more (third party, non-member) managers to run the daily operations of the LLC.
Manager-managed
Manager-managed refers to an LLC that has one or more (third party, non-member) managers to run the daily operations of the LLC.
Managing Member
An LLC member who also functions as the manager of the LLC and runs its day-to-day operations. Sometimes this is referred to as a member-managed LLC.
Member
A member is an individual or business that owns an interest in an LLC. The rights and ownership interest are set out in the LLC Operating Agreement.
Member-managed
A member-managed LLC has one of its members fulfill the functions of a manager and run the day-to-day operations of the LLC.
Merger
When two or more companies combine to form one company.
MERP (Medical, [Dental and Drug] Expense Reimbursement Plan)
A plan which allows a corporation or LLC that elects to be taxed as a C-Corporation to deduct the cost of medical, dental, prescriptions, and non-prescription drug expenses not covered by health insurance. This allowable deduction is limited without the employee having to include the benefit in his or her income. Otherwise, the employee would have to pay for these benefits with after-tax dollars and could only deduct them personally if they exceeded 7.5% of adjusted gross income of the employee.
Minimum Capital Contribution
This is the minimum amount that the stock may be sold for and the minimum amount of capital that must be in a company before it can issue dividends to its owners. Delaware, Florida, and Nevada have no minimum capital requirements.
Minutes
The written record of corporate governance, typically kept in the corporate minute book, that details all of the resolutions adopted by owners and directors as well as other actions taken by the company.
Minutes of the Meeting of Incorporator
After the Certificate of Incorporation is filed with the Secretary of State, the internal operations of the corporation need to be documented in the Minutes of the Meeting of Incorporator, which is a bridge or hand-off to the Initial Director(s). The Minutes of the Meeting of Incorporator hand-over authority from the Incorporator to the Initial Director, through a meeting held whereby the Incorporator acts as initial Secretary of the corporation to (1) call the meeting to order and waive notice of the meeting, (2) cast a ballot to vote in the Initial Director or Directors, and (3) adopt the Initial Bylaws. Following the Minutes of the Meeting of Incorporator, the Initial Director or Directors signs a Unanimous Action and Resolution of Initial Director to appoint officers, authorize the opening of a bank account and issue stock. It is recommended that you order the complete service which includes the Unanimous Action and Resolution of Initial Director to save yourself from having to draft this and complete the stock certificates.
Multi-Member LLC (MMLLC)
An LLC with more than one member is often called a Multi-Member LLC. Some believe that a Multi-Member LLC offers more asset protection benefits than a Single-Member LLC. This is because there is another party who is interested other than a possible debtor, which will provide more defenses in the case the company has a judgment creditor attacking its one member
Non-Profit Corporation
Created with the filing of a Certificate of Incorporation with the Secretary of State, it contains provisions that provide for it to be a non-stock non-profit corporation conducted by a Board of Directors for a charitable purpose. Three articles required by the IRS are added to the Certificate of Incorporation to allow the assets of the corporation to be used for a similar purpose if the business is terminated. After the Certificate of Incorporation is filed, the Incorporator signs the Initial Minutes of the Meeting of Incorporator appointing the initial directors and adopting the Bylaws. While it is possible to only have one director, it is recommended to have at least three named, because that is the minimum number the IRS requires to request a tax determination letter. Within eighteen months of incorporating, the non-profit corporation should submit a Form 1023 application for tax exemption.
Office Action
Correspondence from an examining attorney at the U.S. Patent & Trademark Office which objects, rejects, or allows (with conditions) the subject matter of the trademark. The office action provides that a response is required within six months or the application is abandoned.
Operating Agreement
The LLC Operating Agreement is a “partnership agreement” signed by the members of an LLC that establishes the rules and regulations of an LLCs operations. It is similar to the Bylaws of a corporation, but also includes provisions found in Shareholder Agreements of Corporations. The LLC Operating Agreement is required. It is a private document, not on record with the state of formation. The document may be changed from time to time. Most often changes take the form of an “Amended and Restated LLC Operating Agreement”. The LLC Operating Agreement often has provisions which prevent members from assigning their membership units to non-members without the consent of the other members. It also sometimes has provisions that force a member to sell out at book value if he decides not to work for the LLC. In Delaware, the LLC Operating Agreement even supersedes the Delaware LLC Act. We highly recommend you order the LLC Operating Agreement at the time of formation, with our complete service.
Par Value
Par value is the minimum amount a corporation’s stock can be sold for upon initial issuance. On the Certificate of Incorporation, the owners are required to list the par value of the authorized stock. Note: this does not correlate to the market value of the shares. Typically, people want to keep the par value as low as possible for two reasons. Setting a par value above zero sets the “minimum capital” that must be maintained by the company at all times. Should the company issue dividends that take the value of the company below this, then the directors are personally responsible for allowing that dividend to be issued. Secondly, the par is the minimum amount the stock may be sold for, meaning even the founders have to actually pay into the company at least the amount listed on the stock. However, if you need more than 1500 shares in Delaware you will want to keep your par value very low to keep the initial filing fees low. For example, if you have one million shares of stock authorized in Delaware at zero par, the filing fee will be about $25,000. Alternatively, if you attach a low par value to the shares, such as $0.0001, then the filing fee is only $89. You can always amend the par value and the authorized shares later if needed. For most corporations it is wise to “go private before you go public” to save on initial filing fees and annual maintenance fees associated with a large amount of authorized stock.
Partner
A person who is a member of a Partnership.
Partnership
Filed with a Certificate of Partnership or as a de facto partnership where no certificate is filed, it is a legal entity in which two or more persons agree to conduct business together. Each partner is personally liable for the acts of the partnership.
Pass Through Tax Entity
A Sole Proprietorship, Partnership, LLC (that has not made an election on Form 8832 to be taxed as a corporation), or an S-Corporation in which corporate profits pass-through on the form K-1 to the owners on their personal income returns without a separate corporate tax. The entity avoids the double taxation of a C-Corporation in which the entity pays income tax on its profits and the owners also pay taxes on the dividends.
Passive Income
Income from the activities of businesses that the taxpayer does not physically participate in (passive investment assets), as well as income from all rental activities. Too much passive income may disqualify a corporation from filing a Subchapter S-Election.
Patent
A form intellectual property protection that is registered with the U.S Paten and Trademark Office (USPTO). This protects useful inventions or processes, including business methods and methods of production.
Personal Service Corporation Tax Status
The tax status of a C-Corporation or taxable LLC which provides consulting or personal services. A company with this tax status must pay the top corporation tax rate on its taxable income. (Tax Loophole: The graduated corporate tax rate starting at 15% can be used if at least 6% of the stock in the corporation or units in the taxable-LLC are given to a person not employed by the corporation or taxable-LLC.)
Preemptive Rights
The right, but not obligation, of shareholders to have the first opportunity to buy new issues of stock or pre-empt the sale of stock to a third party. This allows owners to increase ownership and keep unwanted individuals from becoming stockholders.
Preferred Stock
Preferred stock is a different category of stock than common stock, which can also have different value and voting rights. This is designed to maintain control of the corporation’s founders or original members.
President
A president is one of the officers of a corporation, who is generally responsible for the day-to-day operations of the company and signs the contracts.
Principal Office
This is the headquarters of a business, usually as determined by the total activities of the company. These activities include both the muscle center (operations center) and nerve center (executive office). Some states will ask for this on formation documents, although it is not required to be in the Certificate of Formation for most states.
Professional Association
This is a corporation that is an individual or group of individuals who practice a license-required profession, such as lawyers or doctors.
Professional LLC
This is an LLC that is an individual or group of individuals that are in a profession that requires a license, such as lawyers or doctors.
Promissory Note
A binding document that details an “I Owe You” between a creditor and a debtor. Examples of items listed on a promissory note include, but are not limited to: terms and conditions of the loan, when the loan will be repaid, and how the loan will be repaid.
Public Benefit Corporation (see also Benefits Corporation)
Recently added to Delaware law, this is a corporation that has a purpose that benefits the public. It is subject to slightly different requirements than a for-profit corporation and is different from a non-profit, such as a 501(c)(3).
Punitive Damages (Exemplary damages)
An amount of money that is awarded to a victim, with the intention of not just compensating the victim but also punishing the wrongdoer.
Quorum
The minimum number of people who must be present to conduct business at a meeting.
Re-notary
While a certified copy is a certification to a state record, a Delaware “Re-Notary” from the Delaware Secretary of State is only a certification to an original Delaware notary, not any document on record. A certificate issued by the Secretary of State when an original notarized document is submitted to certify that the notary is certified as a notary in that state. It does not authenticate the actual document itself. This can however be helpful for use in international transactions, where business owners want the Minutes of the Meeting of Incorporator to be notarized or a Statement of Organizer to be notarized. This helps provide a “bridge” to the actual managers of a company when that information is not otherwise in the public record.
Receiver
An assigned individual who is in charge of managing the assets of a business, assigned either privately or by court order.
Registered Agent
To incorporate or form an LLC in any state, you do not need to visit that state. You also do not need to have an office in that state. However, you do need to have an “agent” called a “Registered Agent” in the state of incorporation. This is because the legal jurisdiction of that state stops at its borders. Not having an agent in the state would mean that your company could not be served with a lawsuit in that state. To solve this problem, states require a Registered Agent be named for the primary purpose of being on-call to receive and forward lawsuits to the company’s contact person. Named in the formation filing, a Commercial Registered Agent is designated to receive a company’s Service of Process (Summons and Complaint in a lawsuit) on behalf of the company represented and to forward official state correspondence, such as tax notices. This agent must be located, and available, at the provided address in that state. A Registered Agent is required for a company to remain in existence. The Registered Agent can also be helpful as a liaison between the Secretary of State and the company to provide services and assist with administrative questions.
Renewal and Revival
A Certificate of Renewal and Revival regains Current Good Standing for your company after it has gone void by failing to pay franchise tax or maintain a Registered Agent. Should your company fail to maintain a Registered Agent or fail to pay franchise tax and file annual reports, it may lose its right to conduct business, lose its right to its name and have its charter cancelled. Sometimes this is called “going void”. Should this happen to your company and you want to keep your company and reinstate it, you may restore Good Standing Status by filing a Certificate of Renewal and Revival by paying after paying all back penalties and fees, paying outstanding registered agent fees and paying a reinstatement fee.
Resident Agent
See “Registered Agent”.
Respondeat Superior
Legal doctrine that employers are held liable for actions committed by their employees.
Retained Earnings
Previously taxed earnings that a company retains for working capital.
Rights of First Refusal
The preemptive right given by an owner to a lessee that enables the lessee to have the first opportunity to buy the property (should the owner decide to sell it). The owner must give a legitimate offer, which the lessee can either accept or refuse.
S-Corporation
A corporation that has elected to be taxed under subchapter-S of the IRS Code (and therefore not taxed under subchapter-C) by filing a Form 2553 tax election within 75 days of incorporating or 75 days from the beginning of the calendar year. The election is limited to corporations or LLCs with one class of shareholders (or two classes where the only difference between the classes is Voting and non-Voting) with no more than 100 natural person stockholders (no entities or trusts, all of whom are U.S. citizens or green card holders). Every calendar year the corporation must file an 1120S return and therefore it is not required by law to pay income tax and thus passes its taxable income or losses through to its shareholders as reported on a Form K-1 each year. An LLC can also be taxed as an S-corporation by filing a 2553 election under what is called the “check-the-box” regulations.
S-Election
The election by members of a company with one or more U.S. citizens or permanent residents that results in the passing-through of a corporation’s taxable income or losses to the stockholders. The advantage of the S-Election for corporations is that profits distributed as S-Corporation dividends are treated as passive income not subject to employment taxes if reasonable compensation has been paid to stockholders performing services for the S-Corporation.
Secretary
An officer position in a corporation. The secretary usually is responsible for record keeping, for example recording the minutes of the annual meeting and attesting to official corporate business.
Section 179
Allows for the immediate deduction of 100% of the cost of certain defined assets (generally office equipment) and up to the dollar limit defined (as of publication: $105,000) in the Internal Revenue Code. This prevents assets from having to be written off by depreciation slowly during their projected useful life.
Section 220
Section of Delaware General Corporation Law that allows members or shareholders to demand books and records from a business that they have an ownership interest in. There are various requirements for this, such as the request having proper purpose.
Self-Directed IRA
An LLC can be established and funded with your qualified IRA savings through a Self-Directed IRA. This is unusual because traditionally all IRAs could only be invested in certain financial accounts with institutions. It is now possible to fund your LLC with your IRA. However, the LLC agreement must meet certain criteria. Additionally, there must be a qualified administrator named to make sure the funds are being used properly.
Series LLC
A unique LLC with unlimited asset segregation potential. Under one LLC, you can set up numerous “series” owning separate assets. According to the statute, 6 Del. C. Section 18-215, “the debts, liabilities, obligations, and expenses incurred, contracted for or otherwise existing with respect to a particular series shall be enforceable against the assets of such series only, and not against the assets of the company generally or any other series thereof”, as long as separate records are kept for each “series”. Delaware is one of a few states that currently have a Series LLC provision.
The Series LLC has been around since 1997 and has recently become popular as a way to create internal firewalls within one company to protect individual assets from creditors of other assets in the same LLC. This has been used as incubators for businesses and as asset holding vehicles for everything from residential real estate holdings to cargo containers. This entity is not for the novice since the record keeping requirements are much more rigorous than that of a traditional LLC.
Service of Process
Notifying a person that he or she has been served with a legal proceeding or order of the court in a civil or criminal matter. This process includes a summons, complaint, warrant, citation, or subpoena.
Shelf Company
This is a company that is active in the eyes of the state, but does not actually carry out business. One purpose is to sell a company with a history to new businesses.
Single Member LLC
An LLC with one owner. Also known as a member.
Single Purpose LLC
While most LLCs have general purposes that allow the LLC to engage in any purpose authorized by law, some LLCs used for special investor financing, including securitized transactions, have a very specific purpose, such as to just own and manage one defined property. Often lender requirements put other restrictions on the LLC, such as limitations on the ability of the member to amend the agreement without the lender’s consent.
Sole Proprietor
1. This literally means a “one owner” business. Usually, this refers to an unincorporated business. The operator/owner is held fully liable for all business debts and expenses of the company.
2. In the context of taxation, it can refer to a Single Member LLC taxed as a sole proprietorship, where the income and expenses go on the individual’s Schedule C of his or her Form 1040 tax return. Although, this often referred to as a “disregarded entity” that is only for tax purposes. For liability protection, a single member LLC is still regarded as an entity separate from its member.
Sole Proprietorship
An individually-owned business that is not incorporated or is a one-member LLC. The owner (“sole proprietor”) is held 100% personally liable for all business debts and expenses unless they form an LLC.
Springing Member LLC
Required by lenders in special financing transactions, this is a Single Member LLC Operating Agreement which contains a second non-equity special member (an unrelated party) whose primary function is to “spring into action” should the single member go into bankruptcy, or other related triggers. The LLC Operating Agreement restricts the sole-equity member’s ability the LLC should the single member be unable to operate the entity. This is often required to be the form of entity, should the lender repackage or bundle the loan subject to certain restrictions to be sold as a marketable security. The primary purpose is to avoid the assets of the LLC from becoming part of its member’s bankruptcy estate. These LLCs are usually used in loans over $4 million. They also require attorney opinion letters from counsel where the property is located and in the state of incorporation. Lenders also require these be Delaware LLCs.
Statute of Frauds
Legal requirements that certain contracts be in writing, for example contracts for sale of real estate and sale of goods over $500. The Delaware LLC Act has waived these requirements for a Delaware LLC Operating Agreement.
Statutory Trust
Formerly known as “Business Trusts”, statutory trusts are designed for financing purposes to hold a single significant asset, such as a cruise ship, aircraft, or office tower.
Stockholder Agreement
This is an agreement signed by stockholders to place restrictions on the transfer of shares. The purpose of this agreement is to retain rights and control of the company with the original stockholders so as to discourage unwanted third parties from obtaining voting-shares and to stipulate the terms and conditions for the valuation and purchase of shares among the stockholders. Also known as Shareholder Agreement.
Subchapter S-Election
(Also referred to as an S-Election) – The election by stockholders of a company or LLC members with one or more U.S. citizens or permanent residents that results in the passing-through of a corporation’s taxable income to the stockholders. Trusts, corporations, and non-U.S. citizens cannot be stockholders or LLC members without disqualifying the S-Election.
Subsidiary
A business that is mostly or completely owned by another business (see “Umbrella Organization”).
Tax Elections
The elections by companies to be treated as a certain type of entity with regards to tax purposes. (eg. Form 2553 for S-Elections or Form 8832 for C-Elections).
Tax Shelter
An investment that offers the advantage of legally avoiding or reducing tax liabilities.
Taxable LLC
This is an LLC which has elected to be taxed like a C-Corporation which requires filing a Form 1120 U.S. Corporation Income Tax Return each year. This election takes place after filing an 8832 tax election with the IRS (within 75 days of formation or 75 days from the beginning of any calendar year after formation).
Tender Offer
A type of takeover bid where the entity taking over offers a certain price for shares of the entity that is being targeted for takeover.
Tort
A civil, but not criminal, wrong. It is an injury against a person or property, commonly in the form of negligence or intentional acts that harm another.
Trade Name
The name used by a company to distinguish its brand from other brands of the same product type.
Trademark
A registered U.S. Trademark is used to protect the name or image associated with specific goods or services to prevent consumer confusion over the source of those goods or services. The indication that a name or image is protected by a registered trademark is the “Circle R” (®) after the name or image. Prior to registration and while the mark is being used you can indicate you intent to protect it with a “TM” (™) after the proposed mark. To have a mark registered is a process which usually takes from 6 months to more than a year, depending upon the objections, if any, raised by the examining attorney. These are registered in the United States by the United States Patent and Trademark Office. Without filing for protection, your protection, if any, is limited to common law trademark or service mark protection which prevents others from passing off as yours what they are selling. This is a more limited protection in geographic scope and to the identical industry without statutory remedies. It is also possible to obtain a trademark at the state level, which is easier to obtain, but the protection is limited to the boundaries of that state (or those states) where it is registered.
Treasurer
Many corporations have a treasurer as one of their officers, whose job usually involves overseeing the money of the corporation.
U.S. Partnership Return
This is the form 1065 return required for a multi-member LLC which has not elected another tax status. It is an informational return in which the partnership reports income but does not pay taxes. The owners pay taxes according to the K-1 they receive, reflecting their share of the profits or losses.
Ultra Vires
A legal term for actions that are beyond the powers of the entity that took them, such as an invalid corporate act. This is not a common form of claim because corporate charters are often worded to encompass any purpose authorized by law. Therefore, it is difficult to argue the action of a manager was outside the scope of the powers of the entity.
Umbrella Organization
An association of organizations that work together for some specified purpose. The “Umbrella Organization” provides resources, and sometimes an identity, to the smaller organizations that they are responsible for. This term also refers to the Master Company in a Series LLC.
Unanimous Action and Resolution of Initial Director
The Initial Director or Directors need to sign a Unanimous Action and Resolution of Initial Director to appoint officers, authorize the opening of a bank account and issue stock. Without this the ownership and management of the corporation have not been properly established. This basic formality needs to be adhered to help protect the corporation from subsequent attack for not following corporate formalities.
United States Patent and Trademark Office
An office of the United States government that registers patents and trademarks. Applications for patents and trademarks are submitted to the USPTO. The examiner will either approve or reject them.
What Is a Statement of Organizer?
A statement of organizer is a document stating the initial members or managers of an LLC. In an LLC, when the company is formed, a Certificate of Formation is filed naming the authorized person. However there is little connection between this individual and the members or managers of the company, other than a cover letter to the company.
What Is the Purpose of a Statement of Organizer?
To provide for more of a “paper trail” and “bridge” from the Authorized Person (also known as an Organizer) to the initial members or managers, the authorized person can sign a Statement of Organizer setting forth the name of the initial members or managers. To make this even more official, if requested by the customer, this document can also be notarized and even certified by the Secretary of State as being an authentic Delaware notary in what is called a “Re-Notary”. If used for international business dealings this “Re-Notary” can even be apostilled or legalized alongside the Certificate of Formation.
When to Create a Statement of Organizer
Generally, initial members or managers will request a Statement of Organizer when they apply to open a business bank account. It is important to do this as soon as possible after formation to make sure you can obtain one.
What is an Economic Interest?
An economic interest is an ownership share of an LLC that only entitles the holder to receive distributions. This is different than a membership share because an economic interest does not entitle the holder to any control or voting rights.
The benefit (and potential downside) of an economic interest in a company is that you are able to benefit from the company’s profits without having to make the tough decisions that the controlling members make. These people are often called “silent partners” or simply “investors.”
What is an LLLP (Limited Liability Limited Partnership)?
A Limited Liability Limited Partnership, or “LLLP”, is a variation of the Limited Partnership. It functions much like a traditional limited partnership (LP), which has two types of ownership:
- Limited Partners: These are passive investors who don’t have management authority and enjoy limited liability.
- General Partners: Typically the managers of the partnership.
The key distinction between an LP and an LLLP lies in the liability of the General Partner. Unlike in an LP, where the General Partner has unlimited personal liability, an LLLP offers the General Partner limited liability.
Why Choose an LLLP Over LP in Real Estate?
Real estate investors often utilize LPs for holding property titles. In this setup, they become the limited partners and create an LLC (Limited Liability Company) to serve as the General Partner. This strategy ensures they avoid the unlimited liability that comes with being a general partner.
However, the LLLP provides a streamlined alternative. It naturally limits the liability of the General Partner, eliminating the need for forming a separate LLC. This makes the LLLP an attractive option, even though it’s less common in commercial real estate contexts.
How to Establish an LLLP
Initiating an LLLP requires filing a Certificate of Limited Partnership. Within this process, an election is made to classify the entity as a limited liability limited partnership. Interestingly, after the inception of the LLC Act, many have gravitated towards the straightforward nature of LLCs, preferring them over the slightly more complex and costlier LLLP structure.
LLLP vs. LLC: Breaking Down the Differences
When deciding on the ideal business structure, both LLLP and LLC emerge as viable options, especially in the realm of real estate and other investment sectors. The LLC has become the go-to choice because of its simplicity, flexibility and cost-effectiveness
Here’s a comparison to help you understand the differences between LLLPs and LLCs:
Liability Protection
LLLP: Both General and Limited Partners have limited liability protection. This means that personal assets of partners typically aren’t at risk if the LLLP incurs debt or faces litigation.
LLC: All members of an LLC enjoy limited liability. Their personal assets are generally protected from business-related debts and lawsuits.
Complexity and Setup
LLLP: Establishing an LLLP involves filing a Certificate of Limited Partnership, followed by an election to be recognized as an LLLP. It’s a two-tiered approach that may be more complex than setting up an LLC.
LLC: The setup process is more straightforward, usually requiring only the filing of Articles of Organization or a Certificate of Incorporation with the Secretary of State’s office. This simplicity is one reason LLCs have surged in popularity.
Management Structure
LLLP: Features a bifurcated structure, distinguishing between Limited Partners (who are typically passive investors) and General Partners (who actively manage).
LLC: Can opt for member-managed (all members participate in daily operations) or manager-managed (specific members or external managers handle daily operations) structures.
What is Form SS-4?
The SS-4 is the one-page IRS form which is filed in order to obtain an Employer Identification Number (EIN). Typically, this will be filled out and submitted to the IRS immediately after incorporation. However, an entity can submit this form later in its life. It is a fairly simple form to complete. It asks for information that is usually readily available, such as the address of the headquarters, the formation date, the type of entity, etc.
You can obtain this form on the IRS website. However, many customers prefer to have IncNow® assist with the process of obtaining an EIN.
MORE: How to Get an EIN
Winding Up
The process of ending a business. This typically involves selling the business’s assets, paying creditors, distributing the remainder to equity holders, and then dissolving the business.
Worker’s Compensation Insurance
Insurance plans that compensate for the death or injury suffered by a worker while on the job.
Working Capital
The amount of capital/current assets that is available for use in company operations. Working Capital is calculated by subtracting current liabilities from current assets.