FAQ

Firm that meets certain legal requirements to be recognized as having a legal existence, as an entity separate and distinct from its owners. Corporations are owned by their stockholders (shareholders) who share in profits and losses generated through the firm's operations, and have three distinct characteristics (1) Legal existence: a firm can (like a person) buy, sell, own, enter into a contract, and sue other persons and firms, and be sued by them. It can do good and be rewarded, and can commit offence and be punished. (2) Limited liability: a firm and its owners are limited in their liability to the creditors and other obligors only up to the resources of the firm, unless the owners give personal-guaranties. (3) Continuity of existence: a firm can live beyond the life spans and capacity of its owners, because its ownership can be transferred through a sale or gift of shares.

What is a open corporation?

Firm whose shares are publicly traded, and are not monopolized by a small group of investors. Opposite of closed corporation.

What is a close corporation?

Firm whose all issued shares are held by a family or a small group of investors and, therefore, cannot be bought by the public. Also called privately held corporation. See also closely held corporation

limited liability

Legal protection available to the shareholders (stockholders) of privately and publicly owned corporations under which the financial liability of each shareholder of the firm for the firm's debts and obligations is limited to the par value of his or her fully paid-up shares. The firm itself, as a legal entity, is liable for the rest. Also called limited personal liability

limited liability company (LLC)

Relatively recent type of US business structure that combines the limited personal liability feature of a corporation with the single taxation feature of a partnership or sole-proprietorship firm. Its profits and tax benefits are split any way the stockholders/ shareholders (whether individuals or other firms) choose. Tax return for a LLC is filed with the taxation authorities only for the purpose of information, and each shareholder files own tax return separately. See also limited company

limited company

Incorporated limited liability firm whose share capital is restricted by its memorandum of association

Firm

Any business, such as a sole proprietorship, partnership or corporation

Evidence of ownership that represents an equal proportion of a firm's capital. It entitles its holder (the shareholder) to an equal claim on the firm's profits and an equal obligation for the firm's debts and losses. Two major types of shares are (1) ordinary shares (common stock), which entitle the shareholder to share in the earnings of the firm as and when they occur, and to vote at the firm's annual general meetings and other official meetings, and (2) preference shares (preference stock) which entitle the shareholder to a fixed periodic income (interest) but generally do not give him or her voting rights. See also stock

evidence

Methods and rules that guide and govern the establishment of a fact before a court, collectively called the law of evidence.

ownership

Ultimate and exclusive right (conferred by a lawful claim or title, and subject to certain restrictions) to enjoy, occupy, possess, rent, sell (fully or partially), use, give away, or even destroy an item of property. Ownership may be 'corporeal' (title to a tangible object such as a house) or 'incorporeal' (title to an intangible something, such as a copyright, or a right to recover debt). Possession (as in tenancy) does not necessarily mean ownership because it does not automatically transfer title

privately held corporation

Alternative term for closed corporation

closely held corporation

Firm (1) whose most (but not all) issued shares are held by a family or a small group of investors, (2) the number of its shares held by the outsiders or public is large enough to provide a basis for it to be listed on a stock exchange. See also closed corporation

investor

Neither a speculator (who takes on high risks for high rewards) nor a gambler (who takes on the risk of total loss for out of proportion rewards) but one whose primary objectives are preservation of the original investment (the principal), a steady income, and capital appreciation. See also investment

investment

Trade off between risk and reward while aiming for incremental gain and preservation of the invested amount (principal). In contrast, speculation aims at 'high gain or heavy loss,' and gambling at 'out of proportion gain or total loss.' Two main classes of investment are (1) Fixed income investment such as bonds, fixed deposits, preference shares, and (2) Variable income investment such as business ownership (equities), property ownership. In economics, investment means creation of capital or goods capable of producing other goods or services. Expenditure on education and health is recognized as an investment in human capital, and research and development in intellectual capital. Return on investment (ROI) is a key measure of a firm's

trade

Commercial transaction involving the sale and purchase of a good, service, or information

stock exchange

Organized and regulated financial market where securities (bonds, notes, shares) are bought and sold at prices governed by the forces of demand and supply. Stock exchanges basically serve as (1) primary markets where corporations, governments, municipalities, and other incorporated bodies can raise capital by channeling savings of the investors into productive ventures; and (2) secondary markets where investors can sell their securities to other investors for cash, thus reducing the risk of investment and maintaining liquidity in the system. Stock exchanges impose stringent rules, listing requirements, and statutory requirements that are binding on all listed and trading parties. Trades in the older exchanges are conducted on the floor (called the 'trading floor') of the exchange itself, by shouting orders and instructions (called open outcry system). On modern exchanges, trades are conducted over telephone or online. Almost all exchanges are 'auction exchanges' where buyers enter competitive bids and sellers enter competitive orders through a trading day. Some European exchanges, however, use 'periodic auction' method in which round-robin calls are made once a trading day. The first stock exchange was opened in Amsterdam in 1602; the three largest exchanges in the world are (in the descending order) New York Stock Exchange (NYSE), London Stock Exchange (LSE), and the Tokyo Stock Exchange (TSE). Called also stock market. See also exchange

exchange

Open, organized marketplace (such as a stock exchange) where buyers and sellers negotiate prices. Exchanges require an almost instant (real time) bid and ask matching mechanism, settlement and clearing, and market wide price communication and determination.

par value

Apparent worth or the nominal value shown on the principal ('face' or 'head') side of a bill of exchange, currency, security (stock/share, bond), or other type of financial instrument. The par value of a loan stock (bond, preferred stock/preference share) is the value at which it will be redeemed. Some jurisdictions allow shares to be issued with no par value (see no par value share). Par value is typically different from the market price. If the market price is higher than the par value, the difference is called a 'premium;' if it is lower, the difference is called a 'discount.' Also called face value, nominal value, or redemption value.

no par value (NPV) share

Share issued with no par value specified either on the share certificate or in the issuer firm's charter or prospectus. The objectives of its issuance include (1) avoidance of taxes levied according to the share's face value, (2) avoidance of the issuer firm's liability to shareholders in the event the shares have to be sold at a discount, and (3) elimination of investor confusion over the par value and the real (market) value of the share. Cash proceeds from the share-sale are accounted for by debiting the cash account and crediting the capital share account, thus assigning an implicit value to the issued shares. No par value shares may be disadvantageous to shareholders where the firm lowers the value of already issued shares by accepting lower price for the new issue. Also called no par value stock, such shares are common in Belgium, Canada, and the US, but illegal in the UK. Also caled no par share. See also stated value

stated value

Nominal value assigned to a no par value stock, and recorded as the equity capital of the firm generated from the sale of its stock (share) issue. Stated value usually has no relation to the market value of the stock.

charter

Incorporation: Alternative term for articles of incorporation, the US equivalent of the UK's memorandum of association.

incorporation

Method by which individuals are voluntarily united into a new entity through the creation of an artificial, intangible, and legal person called corporation

equivalent

Term indicating substitutability of items if specifications are comparable and performance levels are proven. It is often used interchangeably with 'equal

articles of incorporation

US term for the basic legal document which, similar to the UK's memorandum of association, gives birth to a corporation. Together with the certificate of incorporation (corporation's 'birth certificate') it constitutes the charter that gives the corporation an independent existence as a legal entity. Also called articles of formation or articles of organization

certificate of incorporation

Registered firm's 'birth certificate' showing its legal name and date of incorporation. Also called certificate of registration

What is a registered agent?

Virtually all states require corporations, limited liability companies (LLCs), nonprofits, limited partnerships (LPs) and limited liability partnerships (LLPs) to appoint a registered agent in the state where the company is formed and, if applicable, foreign qualified. The registered agent is responsible for receiving important legal and tax documents on behalf of the company including: Service of Process (Notice of Litigation), franchise tax forms, and annual report forms.
The registered agent may be an individual or it may be a company approved by the state to serve as agent. It must be located at a street address (not a P.O. Box) in the state where the company is formed or qualified to transact business. The registered agent's name and address are included on the incorporation documents, making them a matter of public record.

agent for service of process

Officer appointed by a corporation to receive legal notices or processes on the corporation's behalf. Also called registered agent.

What is Service of Process?

Service of Process, also sometimes called Notice of Litigation, is the legal term for the physical delivery of legal documents such as lawsuits, summons, complaints, subpoenas, orders to show cause, writs, notices to quit the premises and certain other documents. Service of Process documents are typically delivered by law enforcement to the registered agent for the business named in the documents/lawsuit. In most jurisdictions, process must be served and accepted in person for “service” to be completed which is one of the reasons that states mandate that businesses name a registered agent with a physical address, open during standard business hours, in the state

Officer

Corporate (USA): Person appointed by the board of directors of a firm, such as a president, CEO, vice president, etc., to manage the day-to-day business of the firm and to carry out the policies set down by the board.

CEO

Chief Executive Officer. The executive who is responsible for a company's operations, usually the President or the Chairman of the Board.

President

Highest ranking officer in a corporation after the Chairman of the Board. For smaller companies, often the same person as the Chief Executive Officer.

board of directors

Governing body (called the board) of an incorporated firm. Its members (directors) are elected normally by the subscribers (stockholders) of the firm (generally at an annual general meeting or AGM) to govern the firm and look after the subscribers' interests. The board has the ultimate decision-making authority and, in general, is empowered to (1) set the company's policy, objectives, and overall direction, (2) adopt bylaws, (3) name members of the advisory, executive, finance, and other committees, (4) hire, monitor, evaluate, and fire the managing director and senior executives, (5) determine and pay the dividend, and (6) issue additional shares. Though all its members might not be engaged in the company's day-to-day operations, the entire board is held liable (under the doctrine of collective responsibility) for the consequences of the firm's policies, actions, and failures to act. Members of the board usually include senior-most executives (called 'inside directors' or 'executive directors') as well as experts or respected persons chosen from the wider community (called 'outside directors' or 'non-executive directors').

annual general meeting (AGM)

Gathering of the directors and stockholders (shareholders) of every incorporated firm, required by law to be held each calendar year. Generally, not more than 15 months are allowed to elapse between two AGMs, and a 21-day's written notice of its date is required to be given to the stockholders. The main purpose of an AGM is to comply with legal requirements, such as the presentation and approval of the audited accounts, election of directors, and appointment of auditors for the new accounting term. Other items that may also be discussed include compensation of officers, confirmation of proposed dividend, and issues raised by the stockholders. Called annual meeting in the US

calendar year

Twelve-month period starting with January 1 and ending with December 31, and which has 365 days in non leap years and 366 days in a leap year. Also called civil year

civil year

civil year is in the Corporate, Commercial, & General Law and Documentation & Recordkeeping subjects.

annual meeting

US term for annual general meeting (AGM)

shareholder

Individual, group, or organization that holds one or more shares in a firm, and in whose name the share certificate is issued. It is legal for a firm to have only one shareholder. Also called stockholder.

Bankruptcy

Bankruptcy is the process where a person legally declares himself or his business unable to pay outstanding debts. Depending upon the type of bankruptcy filed, one meets with a judge to determine a payment schedule, or have a legal bankruptcy discharge most if not all debts. Businesses also may declare bankruptcy, which either means the business will close, or that the business will continue to operate with reduced payments to debtors. Each country has its own bankruptcy designations, but this explanation will focus on the most common types of bankruptcy in the US.
Bankruptcy for the individual or the married or domestic partner couple comes in three forms, called "Chapters." Chapter 7 bankruptcy is the most common form filed by spouses or individuals. Chapter 12 bankruptcy is restricted to people who are family farmers or fisherman. Individuals or married couples may also file Chapter 13 bankruptcy, but this is rare.
For businesses, the two common forms of bankruptcy utilized are Chapter 7 and Chapter 11. Less commonly, an individual or business might file under Chapter 15 bankruptcy, which involves the clearing of international debts. If an agency of the state, such as a city, must declare bankruptcy, they file Chapter 9 which is also called municipal bankruptcy.
Chapter 7 bankruptcy tends to be used by either individuals or businesses that want a total clean slate. A business that files Chapter 7 bankruptcy tends to close their business as a result. For the individual, Chapter 7 bankruptcy means that the courts declare one unable to pay debts incurred, and almost all debts are then void. Certain federal debts, like student loans, are unaffected by declaring bankruptcy.
One must generally be able to prove that one's income is insufficient to meet debts. A person filing Chapter 7 risks losing the most assets with this type of bankruptcy. One will not lose a primary vehicle or residence under this form of bankruptcy, unless the person has an auto loan and cannot make payments on the vehicle, or a home loan, which he or she cannot pay for.
All assets must be declared when filing Chapter 7. Other assets like second houses, collectibles, and additional vehicles are liquidated to pay debts. Most who file Chapter 7 bankruptcy do so because they have very little left to lose. Once a judge approves the bankruptcy filing, virtually all debts, like those owed to credit card companies and doctors or hospitals are cleared and the person is given a clean slate.
Chapter 13 bankruptcy is filed by individuals who do own a great deal of property or assets, but find that their income cannot cover the exorbitant payments on debts owed. In this form, the debt is restructured, and in some cases reduced so that people retain their assets but have reasonable payments which they can make to debtors. Generally the court-ordered payments must be made on time and regularly in order to avoid having assets seized.
Businesses file a similar form of bankruptcy called Chapter 11. Some or part of the business' debt may be cleared, and payment plans are restructured. Chapter 11 bankruptcy has the purpose of reorganizing debt so that the business can continue to operate.

What is a Certificate of Status?

A certificate of status certifies the registration has been filed and is active with the Division of Corporations.

What is a Managing Member (MGRM) or Manager (MGR)?

Limited liability companies may be member-managed or manager-managed. Member-managed is the simplest structure and means that every member has authority to act on behalf of the business. A managing member (MGRM) is a member of a member-managed limited liability company.

If all of the members of a limited liability company will not have authority to manage or act on behalf of the business entity, then the limited liability company will be manager-managed. In a manager-managed limited liability company, the members elect those individuals, which will have the authority to manage or act on behalf of the company. Those individuals will serve in the capacity of a manager (MGR). A manager (MGR) may or may not be a member of the limited liability company.