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Articles
of incorporation
The centerpiece of the incorporation
process is the “Articles of Incorporation.”
Filing this document with your state brings a
corporation to life and begins the process of
organizing your business. The Articles of
Incorporation is usually a basic form that
contains information about your corporation,
the stock it issues, its appointed
representative, and its organizer. It is filed
with a state agency responsible for
corporations. The articles of incorporation go
by different names in some states. It may be
called a certificate of incorporation,
charter, articles of organization, or similar
title.
Assumed
name
Sometimes a corporation may want to
transact business under a different name than
its corporate name. This is referred to as
using an assumed name, or assumed corporate
name. Some states refer to it as a fictitious
name, or trade name (not trademark). Some
simply call it a d.b.a., or “doing business
as,” as in ABC Corp., doing business as,
“Dean's bookstore.” Using an assumed name,
allows you to present yourself to the public
as different entities, while using only one
corporation and keeping only one set of
books.
Authorized
shares
This is the total number of shares your
corporation will ever have. This number is
stated in the articles of incorporation. You
can only change this number with the approval
of a majority of shareholders and by amending
the articles of incorporation. When authorized
shares are “given out” to the shareholders,
they become “issued” shares.
Board
of Directors
The directors that oversee the affairs of
the corporation are referred to collectively
as the Board of Directors. The board may
consist of one or more persons.
Bylaws
Bylaws are the internal rules by which the
corporation operates.
C
Corporation
The term C corporation is an IRS tax
classification. It refers to a corporation
that reports its income on IRS form 1120. The
C corporation is responsible for and pays its
own taxes. After your corporation is
organized, the IRS recognizes it as a
“regular” or C corporation.
Capitalization
Capitalization is the amount of money or
property that a corporation has when
operations are begun.
Certificate
of incorporation
See articles of incorporation.
Charter
See articles of incorporation.
Controlling
interest
See majority interest.
Common
stock
There are two different types of stock
(shares) your corporation can issue, common
and preferred. Common stock is what
corporations usually issue to shareholders.
Common stockholders receive a pro-rata share
of the corporation’s assets upon its
dissolution. Common stock can be voting, or
nonvoting. Holders of voting common stock get
to elect the directors of the corporation, and
thereby exercise control of the corporation.
Holders of nonvoting common stock do not get
to elect the directors, but they still receive
their pro-rata share of the corporation’s
assets upon its dissolution. Common
stockholders are eligible to receive quarterly
dividends if corporate profits allow.
Corporation
A corporation is a body of persons granted
a charter legally recognizing them as a
separate entity having its own rights,
privileges, and liabilities separate from
those of its members. It is a separate and
distinct entity that acts for, or on behalf of
a person or group of people. A corporation can
consist of one person.
d.b.a.
Doing Business As - See assumed name.
Delayed
effective date
A delayed effective date is put in the
articles of incorporation so that the filing
won’t be effective until that date. If you are
incorporating toward the end of the year, you
may want to include a delayed effective date
of incorporation so that your corporation
won't begin until the first of the upcoming
year.
Department
of State
See Secretary of State.
Directors
Directors are people who oversee the affairs
of the corporation on behalf of the
shareholders, to protect the shareholder’s
interests. They meet from time to time to
review the actions of the corporate officers
who run the corporation on a day-to-day basis.
Directors do not have to be shareholders, but
in a small corporation, they are usually one
in the same.
Dividends
Dividends are bonuses paid to shareholders
based on the number of shares that person
owns. They are usually paid on quarterly basis
as corporate profits allow.
Duration
The duration of the corporation is simply how
long it will exist. If you are using the
corporation to pursue a single project, you
may wish to limit its life span to the length
of the project.
Employer
Identification Number (EIN)
This number is assigned by the IRS. It is an
identifying number, essentially a social
security number for your business. An Employer
Identification Number is obtained by filing a
form SS-4 with the
IRS.
Federal
tax ID number.
See Employer Identification Number
Fictitious
name
See assumed name.
Form
2553
The IRS form filed to elect S Corporation
Status. See S corporation.
Form
SS-4
An Employer Identification Number is
obtained by filing a form SS-4 with the
IRS.
See Employer Identification Number
Incorporator
The incorporator is simply the person who
files the articles of incorporation with the
state. The incorporator really has no rights
except appointing the initial corporate
directors. After the directors are appointed,
the incorporator resigns.
Issued
shares
This is the number of authorized shares
that are actually “issued” out to the
shareholders.
Medical
reimbursement plan
An employee benefit plan that allows the
corporation to reimburse employees for medical
and dental expenses. The reimbursement is
non-taxable to the employee, and is a
tax-deductible expense for the
corporation.
Majority
shareholder
A shareholder who owns more than 50
percent of a corporation's issued shares,
usually 51 percent. The majority shareholder
controls the corporation by electing the Board
of Directors who oversee the corporation and
appoint the officers of the corporation. See
majority interest.
Majority
interest
An owner of more than 51 percent of the
corporation stock is said to have a majority
interest in the corporation. By having a
majority interest, a shareholder controls who
is elected as directors of a corporation, and
thereby controls the actions of the
corporation. A majority interest may be gained
by combining the ownership of one or more
shareholders.
Minutes
Whenever a meeting of directors or
shareholders is held, a record of what was
discussed is kept. This record is known as the
minutes of the meeting.
No
par value stock
See no par stock.
No
par stock
No par stock is stock without par value, or a
fixed price per share. No par stock can be
issued at any price (what buyers will pay for
it) since it does not have a fixed “face”
value.
Nonvoting
stock
See common stock.
Officers
Officers are responsible for running the
corporation on a day-to-day basis. They answer
to the directors of the corporation. Officers
include president, secretary, treasurer,
etc.
Organizational
meeting
The organizational meeting is held after the
articles of incorporation are filed with the
state. At the organizational meeting the
directors and officers of the corporation are
appointed. Stock is also issued. Any other
organizational matter is taking care of
here.
Par
value
Par value of stock is a bookkeeping term that
basically equates to price. If a share of
stock has a par value of one dollar, then one
dollar per share must be given to the
corporation in order to purchase the stock.
Buying 1,000 shares of stock with a $1 par
value, will cost you $1,000. Stock can sell
above or below its par value, but usually not
on newly issued shares.
Perpetual
duration
A corporation with perpetual duration is
one that exists forever, or until the
shareholders terminate it.
Preemptive
rights
Preemptive rights allow existing
shareholders too purchase additional shares of
stock before shares are issued to new
shareholders. Having preemptive rights allows
existing shareholders to maintain their
current ownership percentage despite the
issuance of additional shares.
Preferred
stock
There are basically two different types of
stock your corporation can issue, common and
preferred. Common stock is what corporations
usually issue to shareholders. Preferred
stock, on the other hand is more like a bond
or promissory note. It carries a fixed
dividend percentage rate. Holders of preferred
stock get paid dividends first. If there are
profits left after paying the preferred
dividends, then dividends are paid to the
common shareholders. That’s why it’s called
preferred stock, dividends on it are paid
first. There is a drawback however. As a
trade-off for getting dividends first,
preferred shareholders don’t get to vote on
matters affecting the corporation. Preferred
stock is nonvoting.
Purpose
clause
A purpose clause is sometimes required in
the articles of incorporation. The purpose
clause tells the state what kind of
business your corporation will operate. Some
states require this purpose clause to be very
specific, while others allow the use of a
“general” purpose clause, which basically says
the corporation will engage in any legal
business activity.
Registered
agent
A corporation’s registered agent is the
person appointed to accept legal documents on
behalf of the corporation. If someone sues
you, the papers will be served on the
registered agent at the “registered office.”
Some states use the term “resident”
agent.
Registered
office
See registered agent.
Resident
agent
See registered agent.
SEC
Securities and Exchange Commission, a
federal agency that oversees the issuance of
stock and other securities. This agency is
charged with protecting investors against
fraud relating to the purchase of stock and
investments.
S
Corporation
S Corporation is an IRS tax classification. It
refers to a corporation that reports its
income and expenses on IRS form 1120S.
Although the S corporation is a separate legal
entity, its net profit or loss is shown on the
shareholder’s personal tax return. To become
an S Corporation, file form 2553 with the IRS.
You may also have to file a similar form with
your State Department of Revenue.
Secretary
of State
In most states, this is the state agency
that is responsible for the formation and
regulation of corporations. In some states, it
is known as the department of state, or bureau
of corporations.
Shares
See stock.
Shareholder
A shareholder is an owner of a
corporation. Shareholder is used
interchangeably with the term “stockholder.”
Since someone has to own the corporation, a
corporation must have at least one
shareholder.
Stock
Stock is issued to a corporation’s
shareholders (owners) to show that they own a
part of the enterprise. The term stock is used
interchangeably with the term “share.”
Stock
certificate
A document used to evidence a person’s
ownership of stock in a corporation.
Stockholder
See shareholder.
Voting
stock
See common stock.
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