Glossary of Business Entity Terms
Agent for Service of Process
See Registered Agent.
Articles of Incorporation
A short document filed with a state to formally create a corporation. In some states, it is called a “Certificate of Incorporation.”
Articles of Organization
A short document filed with a state to formally create a limited liability company. In some states, it is called a “Certificate of Formation.”
Authorized Shares / Issued Shares
“Authorized shares” is the total amount of shares which the corporation has the right to issue to stockholders. Shares which are actually issued and sold are called “issued and outstanding.” It is good corporate practice to maintain a “cushion” of authorized but unissued shares to permit the corporation to issue stock in the future to new shareholders, for acquisitions and/or mergers with other businesses and for other purposes. A New Mexico corporation can authorize up to 100,000 shares of stock without exceeding the minimum franchise tax of $25.00, so it is generally a good idea to use that number. The term “Authorized Shares” sometimes is referred to as “Authorized Capital.”
Part of completing the organization of a corporation is the issuance of stock shares to the initial shareholders. Many corporations start by issuing somewhere between 100 and 10,000 shares. If you supply the information indicated in the form, Lawyers Company Service will fill in the stock certificates, ready for signature, and include appropriate language in the initial Directors Consent. If shares are being issued in exchange for property, your accountant will need to prepare a statement for tax purposes.
The most fundamental financial statement, in which assets of the entity must equal its liabilities plus its equity (capital).
Board of Directors
The governing body of a corporation, elected by shareholders. The directors are legally responsible for selecting the officers and for managing or overseeing the management of the corporation.
Blue Sky Law
A term used to describe state laws and regulations governing the issuance and sale of securities to residents of a state and the licensing and regulation of securities brokers and dealers. The laws apply in addition to federal laws relating to those matters.
A long-term debt secured by a lien or mortgage on specific assets of the corporation.
A separate agreement between the stockholders of a corporation that states when and how shares can be transferred or sold. The agreement often commits the subject shareholder to sell, and the corporation and/or other shareholders to purchase, the shares owned by the subject shareholder. For an LLC, these provisions should be set forth in the Operating Agreement.
A document containing procedures and rules adopted by the corporation for regulating the operation and governance of the corporation. The bylaws set the number of directors and contain rules related to voting, the conduct of shareholder meetings and other important corporate matters.
A C-corporation is a regular corporation that does not wish to be taxed as a pass-through entity. It is subject to two levels of tax, one at the corporate level (for corporate profits) and one at the shareholder level (for dividends).
The account of a partner (generally including a member of a limited liability company) that reflects amounts invested by the partner, increased by income and gains and reduced by losses and distributions.
Capital contributions are the money, property or services “paid” by a stockholder in exchange for shares of stock in the corporation, or by a partner in exchange for his partnership interest, or by a member in exchange for his membership interest in a limited liability company. In the case of a corporation, the price per share can be any amount chosen by the Board of Directors. In a partnership or limited liability company, the partners or members generally will have a percentage interest in the entity according to amounts of their respective capital contributions.
Certificate of Good Standing
A certificate issued by a state agency or official to the effect that a corporation is in existence or authorized to transact business in the state and that it is current in filing its corporate reports.
Closely Held Corporation
A corporation with relatively few shareholders; sometimes referred to as a “close corporation.” The most common attributes of a closely held corporation are (1) small number of shareholders, (2) no outside market for the stock, (3) most or all major shareholders participate in management, and (4) transfer of shares is restricted by agreement (see ‘Buy-Sell Agreement’).
Stock may be divided into different “classes,” for example, “common” and “preferred.” Common stock is the basic stock of the corporation that entitles the owner to voting and dividend rights.
The name of the corporation, which generally must end with the words “Incorporated,” “Corporation,” “Limited” or some abbreviation of those words, such as “Inc.” or “Corp.” A corporate name will not be accepted if it is likely to mislead the public, or if a sufficiently similar name is already registered.
A method of electing directors in which each shareholder is entitled to multiply the number of votes held by the shareholder by the number of directors up for election and cast the product for a single candidate or distribute the product among two or more candidates. The right must be specifically granted in the articles of incorporation.
A long-term debt instrument that is unsecured, as opposed to a Bond, which generally is secured. See “Bond”
A method of raising capital in which a business entity borrows money. Compare “Equity Financing”
In accounting, a procedure for recognizing the obsolescence of an asset, in which a portion of the cost of the asset is “spread” over the deemed useful life of the asset. Depreciation may be computed differently for accounting purposes and tax purposes.
The circumstance of shares of a corporation or interests in a partnership or limited liability company being issued at price or value that is less than the value of the interest of the current shareholders or partners.
Directors are responsible for overseeing the business affairs and overall governance of the corporation. The directors of a corporation are elected by the shareholders.
The statutory procedure that formally terminates the legal existence of a corporation, partnership or limited liability company. As a part of the overall dissolution process, the assets of the entity will be sold and/or distributed and its business affairs will be wound up.
Dividends are profits distributed to the shareholders of a corporation. Besides cash, a dividend can also be paid in shares of stock or other property, the latter being somewhat uncommon.
The phenomenon in which a C-corporation is taxed on its earnings and then individual shareholders are also taxed on any dividends that are distributed.
Earnings per Share
A basic measure of profitability of a corporation, equal to net earnings divided by the number of shares outstanding.
In accounting or corporate practice, the term ‘equity’ means ownership or net worth.
A method of raising capital in which a corporation sells shares of stock, or partnership or LLC issues partnership or membership interests. Compare “Debt Financing”
Fair Market Value
Fair market value is the price for which property, services or assets would sell in an open market. If there is no regular market or if no reliable price quotes are available, then the fair market value is based on a good-faith estimate of the value.
Federal Securities Laws
Refers to the body of laws and regulations governing the issuance and sale of investments in business organizations and enterprises, brokers and dealers in those investments and markets and exchanges on which the investments are traded. Compare “Blue Sky Laws”
A fiscal year is any 12-month interval used by a corporation or LLC as its accounting period. For most LLCs and small corporations, and especially for S-corporations, the end of the fiscal year is December 31. A C-corporation, however, generally may choose any date desired as the corporation’s fiscal year-end. Taxes are computed based on income earned during that fiscal year.
Foreign Corporation / LLC
A corporation or LLC that has a presence in a state other than its state of incorporation or organization. If the activities of the foreign corporation or LLC constitute “doing business” in the other state, the foreign entity will need to register as a foreign corporation or LLC.
A regular partnership, as opposed to a limited partnership, often defined as “an association of two more person to form or pursue a business.”
A process by which a business raises capital by selling securities to the general public. The process usually requires registration under federal securities laws and Blue Sky Laws and, in the case of an initial public offering is often difficult and expensive.
A basic accounting financial statement showing the results of operations of the business over a specified period, usually monthly, quarterly or annually.
An undertaking by a corporation or limited liability company to provide protection to its directors, officers, and employees against expenses and liabilities incurred by them in lawsuits alleging that they breached some duty in their service to or on behalf of the corporation. Indemnification provisions also may provide payment of legal costs incurred by those persons to defend such lawsuits.
One or more person(s) who perform the act of incorporation and who sign the articles of incorporation and deliver them for filing. The incorporator, or organizer in the case of an LLC, need not be a shareholder, member, officer or director of the entity to be an incorporator.
Issue / Issuance
The act of selling and placing shares of a corporation or membership interests of an LLC to a shareholder or member. (See also Authorized Shares )
A business form generally described as a limited-purpose partnership. Joint ventures, however, may be formed as partnerships, limited liability companies or even corporations.
Shorthand reference to Form K-1. A federal income tax return for a partnership or S corporation will include a Schedule K that contains certain financial accounting information about the preceding tax year of the partnership or S corp. The Form K-1 is the portion of Schedule K that the business distributes to each partner for inclusion in the partner’s respective personal tax return.
Limited Liability Company (LLC)
A type of legal entity used for doing business and owning property. Nowadays, the LLC is the most common form of entity, but probably the least understood. It is sometimes wrongly called a ‘limited liability corporation,’ but it is not a corporation. See, this site, under "Business Entities".
Limited Partnership (LP)
A type of partnership that has two types of partners, general and limited. The limited partners generally have liability that is limited to the amount of their investment in the partnership. The general partner, on the other hand has unlimited liability. An LP is created by filing a ‘certificate of limited partnership.’
Limited Liability Partnership (LLP)
A general partnership that elects to limit the otherwise unlimited liability of the partners. The governing state laws may place restrictions on the type and/or amount of this limitation of liability.
Limited Liability Limited Partnership (LLLP)
A limited partnership that elects to limit the otherwise unlimited liability of the general partner(s).
A “manager” means basically what it sounds like — the person who makes most of the management decisions, and practically all of the day-to-day ones, for the limited liability company. If the Company has a Manager, the Members generally do not take part in any daily duties or responsibilities; that really is the whole idea of having a manager. An LLC can have more than one Manager but usually no more than two or three. The Manager(s) need not be Members of the Company, but it’s generally recommended. An LLC need not have managers; instead, the members may choose to manage the LLC directly.
The Members are the owners of the LLC, somewhat like partners in a partnership or shareholders in a corporation. Members have the right to share in the profits and losses of the LLC and, if there are no managers, the right to vote on the business affairs of the LLC.
An LLC’s membership interests represent ownership in the company and gives the holder the right to vote on the company’s business affairs (unless management of the company is by managers), the right to share in the profits, or both. Membership interests can be expressed either in Units or percentage interests. In most cases, a membership interest will resemble more a partnership interest than stock of a corporation.
The Articles of Incorporation must state the maximum number of shares that may be issued by the corporation. If additional shares are required, the Articles of Incorporation must be amended. There is no maximum on the number of shares that can be authorized, but be advised that some states, including Delaware and Nevada, base their initial filing or annual corporation tax on the number of shares authorized.
See Promissory Note
The officers of a corporation run the day-to-day operations with oversight by the Board of Directors. Corporations traditionally have three officers: president, treasurer and secretary, although this is no longer required in many states. There is no limit on the maximum number of officers, and a person may hold more than one office. If the corporation has a president and a secretary, it is advisable that these not be the same person, if possible.
Most LLCs implement an operating agreement, which is similar to a partnership agreement and contains extensive provisions for the internal management of the LLC. Some of the key issues covered in the operating agreement are the following:
- Margin required to call meeting – 40% of Members’ percentage interests
- Quorum required – majority of Members
- Margin required for action – majority of Members percentage interests represented at meeting
Members’ Meetings – Calling of meetings and voting by members.
Cash distributions, profits and losses, and similar items are made according to Members’ percentage interests
The Manager will serve indefinitely but can be removed as manager by proper action of the Members. If the Manager dies, resigns, etc., the Members can fill the vacancy. If there is more than one Manager, they normally govern by consensus. If they are in disagreement about the management of the LLC, the Manager with the greatest percentage interest wins the argument. If they’re equal in interest, the Members can meet and break the deadlock. The Manager(s) can call a meeting of the LLC.
For the non-professional, this is pretty technical stuff. The Operating Agreement mirrors the NM statute to a great extent. Upon occurrence of certain events: death, insolvency, etc. of a Member, the legal “fabric” of the LLC is considered compromised, much the same as it would be in a partnership. If the other Members agree to continue the LLC, then the Company continues without interruption. Otherwise, the LLC will be “dissolved,” and the assets will be sold, bills paid and any funds left over are distributed proportionally to the Members. The Members may also just decide to dissolve the Company, but that must be unanimous.
An arbitrary minimum price at which a share of stock may legally be issued, as designated in the articles of incorporation. The concept is largely antiquated, and most modern corporation statutes no longer provide for par value.
Partnerships, LLCs and S-corporations are "pass-through" entities for federal income tax purposes. This means that these entities generally are not themselves subject to income tax. Rather, the items of income, gain, loss, deduction and credit “pass through” the entity are taxed only to the owners individually. (See Choosing Your Business Entity on this web site)
Piercing the Corporate Veil
Piercing the corporate veil is a legal theory sometimes used to impose personal liability on shareholders, officers, and directors for corporate acts. Under this theory, a court might disregard the separate identity of a corporation which is flawed in its formation and/or operation. The theory also may be applied to a limited liability company.
A written obligation to repay a debt. Promissory notes may be payable on demand, at a certain future date (called maturity) or be payable in two or more installments. A note may or may not bear interest and may or may not be secured by property known as collateral. Common situations that involve promissory notes are mortgage loans and automobile loans. In corporate practice, bonds and debentures are fundamentally promissory notes.
The percentage or proportion of voting shares, or LLC membership interests, required to be represented in person or by proxy to constitute a valid shareholders meeting, or members meeting, or the number of directors required to be present for a valid meeting of the board.
The re-acquisition by a corporation of shares from one or more of its shareholders.
Registered Agent /Registered Office
Every corporation or LLC is required to appoint a “registered agent” and specify a “registered office,” which is the physical address of the registered agent. The registered agent is the official “contact point” for the corporation. As such, the agent will receive official correspondence from the Secretary of State and other state agencies and the complaint and summons, in the event of a lawsuit filed against the corporation or LLC.
In New Mexico the following rules govern the selection of a registered agent:
For a CORPORATION, the Registered Agent may be one of the following:
- New Mexico resident individual.
- New Mexico corporation with a NM place of business that is the same as the registered office.
- Non-New Mexico corporation qualified to do business in NM, at its registered or principal office in New Mexico.
For an LLC, the Registered Agent may be one of the following:
- New Mexico resident individual
- New Mexico corporation, limited liability company or partnership with a NM place of business that is the same as the registered office.
- Non-New Mexico corporation, limited liability company or partnership qualified to do business in NM, at its registered or principal office in New Mexico.
To be appointed as Registered Agent, the person or entity must sign a document called a “Statement of Acceptance”
In other states, the Registered Agent may be termed “Agent For Service of Process” or “Resident Agent.”
An S-Corporation is a corporation that elects to be taxed as a “pass-through” entity. In this case, the profits and losses are passed through directly to the shareholders. This eliminates the double taxation issue associated with C-Corporations. For more information about S Corporations and the election which must be filed to achieve that status, please consult your tax adviser or see Choosing Your Business Entity section on our site. NOTE!! There are certain time limits and deadlines that relate to filing the S Corporation.
Aside from their special tax status, S-Corporations are structured and documented like C-Corporations.
Investment instruments and transactions, along with the markets and persons through which they are transferred, are regulated by a vast body of laws and regulations known as the “securities laws.” Both federal and state laws usually are involved, so several layers of compliance may be required. Many persons, including some professionals, are surprised to learn that the securities laws can apply to the formation of small LLCs, corporations and partnerships. The consequences for violations can be severe – including civil and even criminal penalties. Generally, however, forming an LLC or corporation with only one person, or a very small group of family and/or close friends who will participate actively in managing the company, will not violate the securities laws. Otherwise, it becomes important to seek advice from an attorney who is knowledgeable in this area.
The shareholders are the owners of a corporation. A shareholder can also be a director and officer of the company.
LLC which is intended to have only one member is called a “single-member LLC.” (A husband and wife combination in a community property state like NM may be considered a single member.) A single-member LLC has special significance for tax purposes – see Business Entities on this web site for additional background information. Your tax advisor or an attorney can assist you in deciding whether this option is appropriate for your business.
Tax Identification Number (TIN)
A federal tax identification number ("TIN") is a unique number assigned to a corporation by the IRS for the purpose of identification. This is the equivalent of a social security number for an individual. An SS-4 form is used to request a tax identification number.
Trade Name (or DBA)
A trade name is the name under which the corporation may do business if it does not use the actual or “legal” name of the company. For example, if Jones Development Corporation does business as “Bruce Jones & Sons,” then “Jones Development Corporation” is the legal name and “Bruce Jones & Sons” is the trade name. In New Mexico registration of a trade name is optional; in other states it may be required.
“DBA” stands for “doing business as” and is similar to a trade name. New Mexico does not regulate the use of a DBA at the state level.
Shares of a corporation that were formerly issued and outstanding but have been re-acquired by the corporation. This concept has been eliminated in modern corporate statutes, which now treat all re-acquired shares as authorized but unissued shares.
In securities law and practice, an underwriter is someone (usually a firm) that agrees to buy securities issued by a company (the issuer) and resell them to investors. In some situations, a person that resells securities issued by a company can inadvertently become a technical ‘underwriter’ and this can create legal liability for the person and/or the company.
If a lender charges interest in excess of what is permitted by law, that is referred to as ‘usury’ and the loan would be ‘usurious.’ Usury laws generally are intended to protect consumers, and many loans to businesses are exempt from usury laws.
Venture Capital (VC)
Startup companies sometimes seek investment capital from professional investment firms known as venture capital firms. VC investments often take the form of preferred stock or similar security and may have very complex terms. Because many early stage companies are unsuccessful, VC investors generally take a substantial ownership position in the investee company and often receive positions on the board or governing body of the company.
Yield is the income return on an investment, such as interest or dividends received from holding a particular security. It is usually expressed as a percentage.