We have included a comprehensive glossary to help guide you through the sea of business terminology, specifically regarding entities and entrepreneurship.
Alternative Tax (Assumed Capital) Method – An alternative method for calculating Delaware franchise taxes for Corporations with par value stock less than $100 (cannot be used if stock has no par value). Alternative Tax is determined by dividing corporation’s gross assets by all issued shares and then multiplying this number (quotient) or the actual par value, whichever is greater, by the authorized shares. Divide this figure by $1,000,000, and then multiply by $350 to get final tax due. Corporations are allowed to pay the lesser of Alternative Tax Method and Authorized Shares Method. Added to this figure is a $50 Annual Report Filing fee to make a minimum tax of $125. Maximum tax is $180,000.
Amendment – A formal filing with the Secretary of State that amends the original or any prior filing, e.g., change company name, change number of authorized shares, change par value, etc.
Annual Agent – Same as “Registered Agent.” Annual Agent is required by statute to be appointed by the company to receive and forward legal and government documents on behalf of the company. Sometimes called Annual Agent because services are paid for on an annual basis.
Annual Meeting – A yearly meeting of a corporation’s stockholders wherein the previous year is reviewed and the upcoming year is planned. Actions are taken by vote and documented in minutes and resolutions.
Annual Report – In Delaware, for LLCs this “report” is simply an invoice for franchise taxes due. Only information contained on the Annual Report is the name of the entity and the franchise tax due.
Anonymity – The state of being not known. Delaware does not require any business entities to list the owners on any public record, nor are Delaware Registered Agents required to maintain information pertaining to those holding beneficial interests in the companies they represent.
Apostille – A separate document required by foreign countries that are parties to the 1961 Hague Convention (most US allies) that attests to the validity of a signature on a U.S. document. The apostille allows the foreign country to accept the validity of the U.S. document for use in its territory. Order Apostille.
Asset – An object possessed or owned by an individual or entity that has value.
Asset Protection – A method by which an individual or entity protects their assets through the use of multiple entities, trusts, insurance, and estate planning.
Assumed Capital – The value of a Corporation’s shares determined by dividing its gross assets by all of its issued shares and then multiplying this number (quotient) or the actual par value, whichever is greater, by its authorized shares.
Authorized Shares – See “Authorized Stock.”
Authorized Shares Method – The standard method of calculating a Corporation’s franchise tax in Delaware is determined by assigning a tax for a certain range of authorized shares. For instance, authorized shares of 5,000 or less result in a tax of $75. Added to this is the $50 Annual Report Filing fee to make a minimum tax due of $125. Maximum tax is $180,000.
Authorized Stock (or Authorized Capital Stock) – The total number of shares of stock that a Corporation authorizes itself to issue. This total must be provided in the original Certificate of Incorporation, but can be amended in the future. Amount of Authorized Capital Stock may affect filing fees and franchise taxes.
Beneficial Owners – Those with an ownership interest in an entity. Called “beneficial” because they benefit from the profits of the entity.
Board of Directors – A group of directors, elected by a majority of the shareholders, that manage a Corporation.
Bylaws – The ground rules adopted by a Corporation that help govern the main issues of its management and administration. Normally contain provisions governing directors, officers, shareholders, and meetings. Initial bylaws are usually adopted by the Incorporator, or by the initial directors at the Organizational Meeting.
C Corporation – The classic, general corporation. Sometimes referred to as a C Corporation due to it being taxed pursuant to Subchapter C of the IRS Code.
Capital Gains or Losses – Gains or losses that result when a capital asset, such as stock, is sold for more or less than its original purchase price.
Capital Stock – Same as “Authorized Stock.” Sometimes referred to as Capital Stock because the value or capital of the Corporation is normally based on the amount of authorized stock.
Certificate of Authority – Document filed with the Secretary of State that officially authorizes a corporation formed in another jurisdiction to conduct business in the state where the Certificate was filed.
Certificate of Existence – Official document issued by the Secretary of State that confirms an entity is in good standing with the state, i.e., franchise taxes are current, registered agent appointed, etc.
Certificate of Formation – Document filed with the Secretary of State that officially creates an LLC in Delaware.
Certificate of Good Standing – Official document issued by the Secretary of State that confirms an entity is in good standing with the state, i.e., franchise taxes are current, registered agent appointed, etc. To order a Certificate of Good Standing, please click here.
Certificate of Incorporation – Document issued by the Secretary of State that officially creates a Corporation in Delaware.
Chancery Court – Specialized court in Delaware staffed by judges who are expert in business and commercial transactions. This court only handles business cases, and already has established a long line of precedents protecting the rights of business owners.
Charter – Same as “Certificate of Incorporation.” Sometimes referred to as Charter because that was the name used by the earlier legislatures when only an act of the legislature could incorporate a business.
Close Corporation – A Corporation whose shares cannot be easily transferred without the approval of the other shareholders. Managed by shareholders, instead of Board of Directors. Normally used for small businesses and family-owned business, in conjunction with a Subchapter S election.
Common Law Trust – A trust created pursuant to and governed by English Common Law precedents. Normally, a grantor of assets into a common law trust cannot maintain control over those assets without those assets still being considered a part of the grantor’s estate and subject to attachment.
Common Stock – The standard class of stock that provides its holders with the right to, among other things, vote on important matters, elect directors, and collect dividends. Sometimes referred to as Primary Stock.
Consideration – What someone pays to someone else in exchange for receiving something in return.
Consolidation – The act of joining two separate and distinct existing entities into one new entity. Normally authorized by resolution and achieved by executing an Agreement of Consolidation between the parties involved. A Certificate of Incorporation is required for the new entity.
Contract – A private agreement entered into by two or more parties, and supported by valid consideration, wherein the parties agree to adhere to certain terms and conditions for an established period of time, or indefinitely.
Contribution – Money, services rendered, or other consideration paid to an entity in exchange for ownership in that entity.
Conversion – The act of switching from one entity type to another, yet still preserving the original entity’s date of formation.
Corporate Compliance – The act of maintaining proper corporate records and registered agent services, making timely franchise tax payments, holding the entity out as a separate and distinct being, and not commingling personal assets with corporate assets.
Corporate Income Tax – A state tax on profits generated by Corporations who conduct business in Delaware.
Corporate Indicators – Endings to entity names that are required by the Secretary of State to enable the public to know it is dealing with a corporation. For example, Delaware corporation names must end with “Incorporated,” or “Inc.,” “Corporation,” or “Corp.,” or “Limited,” or “Ltd.”
Corporate Record Book (or Corporate Kit) – A book or kit that organizes all of the key documents of the Corporation, such as the Certificate of Incorporation, Bylaws, Stock Certificates, Stock Transfer Ledger, Minutes, Resolutions, etc.
Corporate Veil – A shield of limited liability afforded to Corporations and LLCs that maintain their corporate compliance. Creditors cannot proceed against owners’ personal assets.
Correction – A filing with the Secretary of State that corrects a clerical error in a previously filed document.
Court of Chancery – Same as “Chancery Court.”
Cumulative Preferred Stock – Preferred stock that provides the holders the privilege of receiving cumulative dividends, as well as current dividends, prior to any dividends being paid to common stock holders.
Delaware – The Incorporation State!
Delaware Corporate Law – An expert body of law first created over 100 years ago that governs nearly every aspect of corporate governance and affairs of Delaware Corporations.
Delaware Court of Chancery – Same as “Chancery Court.”
Delaware General Corporation Law (DGCL) – An expert body of law modeled after the Model Business Corporation Act.
Delaware Limited Liability Company Act (DLLCA) – A leading body of law governing LLCs formed in Delaware.
Delaware Statutory Trust Act (DSTA) – A ground-breaking body of law that provides for the creation of trusts outside the realm of English Common Law. Here, a grantor can not only remain a beneficiary and still maintain limited liability protection, but can also act as trustee or advisor to the trust.
Delaware: Better Than Offshore™ – This is a protected mark of Harvard Business Services, Inc. that refers to Delaware’s status as an Offshore Financial Centre. “Better” refers to the fact that Delaware and U.S. governments do not require the entity or its registered agent to disclose who holds beneficial interests in the entities formed here.
Directors – Individuals elected to manage the affairs of a Corporation. Sometimes, LLCs choose in their Operating Agreements to have directors, which said directors may be individuals or entities.
Dissolution – The act of formally dissolving an existing entity that no longer intends to conduct business in its home state in the future.
Distribution – The transfer of money or other property from a partnership to a partner.
Dividend – The payment of money or other property by a Corporation to its shareholders. The making of this payment is at the sole discretion of the Board of Directors.
Doing Business As (DBA) – The act of conducting business under a trade name that is different than the official or true name.
Domestic Corporation – A Corporation that has incorporated in Delaware.
Domestication – The act of changing the home state of an entity from one jurisdiction to another, preserving the original date of formation.
Double Taxation – The taxation of corporate earnings at the corporate level and again at the shareholder level. A Corporation pays income tax on its annual profits. Then, if it issues a dividend to shareholders, these shareholders must pay taxes on this income again on their separate returns.
EBITDA is an acronym which means “Earnings Before Interest, Taxes (Income) Depreciation and Amortization. It is a widely used measure of “normalized operating free cash flow.” In appraisal parlance it is the “normalized” adjusted free cash flow after fair market compensation to the owner(s) or principal shareholders for work they actually perform.” This is the datum to which earnings multipliers are normally applied to determine value. In small business this is used in lieu of EPS (Earnings Per Share) typical of public companies.
Electronic Signature – A mark, symbol, notation or signature in electronic form that is utilized to indicate one’s intent to be bound by that document.
Electronic Transmission – Any form of communication not in paper form that creates a record that can be retained, retrieved and reviewed by the recipient. Delaware allows voting by and notice to shareholders to be provided via electronic transmission.
Employer Identification Number (EIN) – The tax identification number provided by the Federal Government to each entity that applies. Same as “Federal Tax Identification Number.” Get your EIN.
Equity – An ownership interest in a corporation or LLC, evidenced by stock or membership certificates.
Estate Planning – The process of creating, while still alive, a mechanism for preserving assets for distribution to others upon one’s death. This mechanism also usually intends to avoid or reduce any tax burden normally imposed by such a transfer.
Family Limited Partnership – A limited partnership created by a family to help protect the family’s personal assets. Normally, the parents act as the general partners and place all of the family assets, like the home and the cars, into the FLP. The children are designated as the limited partners and contribute no assets to the FLP. Typically, each parent owns ½ % of the FLP, and the children own the remaining 99%, usually in a trust. If the parents are sued, then only 1% of the family’s assets are at risk.
Federal Income Tax – Taxation by the U.S. government of the income realized by individuals and entities during a given fiscal or calendar year.
Federal Tax Identification Number – Same as “Employer Identification Number.”
Foreign Corporation – A corporation first formed outside of Delaware authorized to conduct business within the State of Delaware.
Forfeiture – The act by which the Attorney General or the Chancery Court forfeits the charter of a corporation due to the corporation’s abuse, misuse or nonuse of its corporate powers.
Franchise Tax – An annual tax levied upon all Corporations and LLCs for the privilege of being incorporated or formed in Delaware. All LLCs pay franchise tax of $250. The minimum franchise tax for Corporations is $125. Make a payment online.
General Partner – The partner in a limited partnership or general partnership that manages the daily business operations and therefore is responsible for the business debts. A general partner can be an individual or an entity.
Good Standing – The status of being current with all franchise taxes, filings, and registered agent services. To order a Certificate of Good Standing, please click here.
Governing Instrument – The private agreement created by a grantor of a trust that governs the operations of the trust and the rights and responsibilities of the trustees and beneficiaries.
Gross Assets – The sum total of all assets of an entity, before deducting any expenses or taxes.
Holding Company – A corporation whose sole purpose is to hold stock in other companies and manage these companies’ passive income assets.
Home State – The State in which an entity incorporates.
Incorporator – An individual or entity that incorporates a Corporation on behalf of a client by filing the necessary formation documents with the Secretary of State and returning them to the client. Normally, the incorporator is the Corporation’s registered agent.
Indemnification – The act of holding another party harmless for any claims that are brought against that party.
Integrated Estate Planning – A comprehensive asset protection plan that involves estate planning, domestic and international trusts, and multiple-entity strategies.
IRS Form 1023 – A form required by IRS to apply for tax-exempt status.
IRS Form 1040 – A form required by IRS to file annual income tax return for individuals.
IRS Form 1065 – A form required by IRS to file annual income tax return for partnerships.
IRS Form 2553 – A form required by IRS to elect Subchapter S tax status for a general or close corporation.
IRS Form SS-4 – A form required by IRS to apply for a Federal Tax Identification Number.
Issued Shares – Those common and preferred shares that a Corporation chooses to issue to its existing or potential shareholders.
ITIN – Individual Taxpayer Identification Number. Now required for a foreign individual before their company can get an EIN (Employer Identification Number). Order Online.
L-1 Visa – A U.S. visa granted to a nonresident alien employee whose company has offices in the U.S. and the company wishes to transfer this employee to work at the U.S. location.
Limited Liability – The liability of an owner of a Corporation, LLC, or Statutory Trust for the business debts of the entity is limited to the owner’s investment in the entity. Owners’ personal assets are protected.
Limited Liability Company – An entity that provides owners with limited liability and pass-through taxation benefits. Governed by a private, flexible contract called an Operating Agreement. Owned by Members with membership certificates.
Limited Liability Limited Partnership – A new combination of LPs and LLPs. The general partners are afforded limited liability protection, in addition to the limited partners.
Limited Liability Partnership – A general partnership that affords limited liability protection to its partners. Normally used by professional firms.
Limited Partner – An investor in an LP or LLLP who is not involved in the management of the partnership. Liability is limited to the amount of the investment.
Limited Partnership – An entity composed of general and limited partners. General partners own and manage the company, so their liability exposure is widespread. Limited partners are only investors, not managers, so their liability is limited to their investment.
Manager – An individual or entity chosen by the Members of an LLC to manage the daily operations of the LLC. A Manager can be, but does not have to be, a Member.
Managing Company – A separate company from the Operating Company that manages the assets of the Operating Company in return for a management fee.
Managing Member – A Member of an LLC that also serves as a Manager of the daily operations.
Member – An owner of an LLC; can be an individual or an entity.
Membership Certificate – Evidence of ownership or Membership Interest in an LLC provided to its Members.
Membership Interest – Ownership in an LLC.
Merger – The act of joining two separate, existing companies into one, surviving company that will conduct business into the future. The non-surviving company disappears.
Minimum Tax – The minimum franchise tax due in Delaware for Corporations is $125 for all Corporations with less than or equal to 5,000 shares, or with less than or equal to $75,000 in Assumed Capital.
Minutes – A record of the actions taken during a meeting of a Corporation’s board of directors or shareholders, normally maintained in the Corporate Record Book.
Name Change Amendment – A formal filing with the Secretary of State that amends the original company name. Click here to change your company name.
Name Reservation – The act of filing an official reservation of an entity name with the Secretary of State. Names can be reserved in Delaware for free for 30 days by HARVARD.
Net Assets – Gross assets, less all expenses and taxes due.
No Par – A share with no specific monetary value given to it. The actual value of the shares is determined by the board of directors.
Nonprofit Corporation – A Corporation organized for some charitable, civic, or religious purpose that does not generate profits for its shareholders. Must apply for non-taxable status with the State and Federal Government.
Nonresident Alien – A nonresident of the U.S. can form an LLC in Delaware and can avoid paying income taxes or filing tax returns if no U.S. source income is generated and the nonresident alien spent less than 180 days in the U.S. during that tax year.
Nonstock Corporation – Same as “Nonprofit Corporation.”
Offshore Financial Centre – A jurisdiction that provides investors with legal frameworks for protecting their personal assets. Delaware is the best Offshore Financial Centre, and with its guarantee of anonymity, and flexible LLC structure.
Operating Agreement – The private, flexible contract between Members of an LLC that governs the creation, management, and daily affairs of the LLC.
Operating Company – A separate company that owns assets and then leases these assets to a Managing Company for actual use.
Organizational Meeting – The initial meeting of the initial directors wherein the board of directors is appointed, and the bylaws are adopted.
Organizer – An individual or entity that organizes an LLC on behalf of a client by filing the necessary formation documents with the Secretary of State and returning them to the client. Normally, the organizer is the LLC’s registered agent.
Paid in Capital – Shares that were acquired through the payment of actual consideration.
Par Value – The stated minimum value of a Corporation’s stock.
Partly Paid Shares – Delaware allows a Corporation to issue shares for less than the full consideration, with the balance due and callable by the board of directors at some future time.
Partnership – An informal association of two or more individuals normally created by a private partnership agreement. There is no limited liability afforded to the partners, although the partnership agreement can provide indemnification rights to all or some of the partners.
Partnership Agreement – A private agreement between partners that establishes a partnership and governs the terms and conditions of the partnership relationship.
Pass-Through Taxation – All income and profits are passed through the entity to the owner and this income is only taxed one time. LLCs and S Corporations provide this tax benefit to their owners.
Passive Income – Income generated from the licensing of intangible assets, like intellectual property.
Passive Income Assets – Intellectual property, e.g., trademarks, patents, copyrights, royalties.
Pierce the Corporate Veil – The act in which creditors are able to attack the personal assets of a Corporation’s owners due to the Corporation not conducting business as an entity separate from its owners, e.g., commingled funds, no or incomplete corporate records, unpaid franchise taxes or registered agents.
Preferred Stock – A special class of stock that can contain more favorable terms than common stockholders get. Preferred shareholder rights can be negotiated to suit the requirements of the deal. The Board of Directors have enormous flexibility in pricing the stock and negotiating other special terms. For example, preferred shares can can
be voting or non-voting or it could have super-voting rights, like 100 votes per share instead of the one vote per share common shareholders get. Money from investors for preferred stock can be structured as debt with interest payments, and guarantees, such as a security interest in the company’s assets or intellectual property. Usually, preferred shareholders get paid dividends or asset distributions before common stockholders. An excellent way to attract investors, and also maintain control of the company Delaware allows your authorized block of Preferred Stock to be segmented into different “series” wherein each series can have its own rights and terms. Therefore, if you have 100,000 shares of Authorized preferred shares you can split them into ten different series of 10,000 shares each and separately negotiate the terms for each series. That technique, invented in Delaware, is called “Blank Check Preferred.”
Principal Place of Business – The actual, physical location wherein a company conducts the greatest portion of its business. Not the same as Registered Office.
Private Corporation – A Corporation whose shares are not publicly traded on any exchange.
Professional Corporation – A Corporation owned by licensed professionals in a given field whose sole purpose is to conduct business in that field.
Proxy – The granting of a shareholder’s voting rights to another party to vote on that shareholder’s behalf because the shareholder is not able to attend a meeting. Delaware allows for electronic proxies.
Public Corporation – A Corporation that trades its stock on a public stock exchange like the New York Stock Exchange or NASDAQ. Regulated by the Securities and Exchange Commission.
Quorum – The minimum number of directors or shareholders required to be present at a meeting before any valid action can be taken.
Registered Agent – An entity appointed by the company to receive and forward service of process and other government documents, such as franchise tax reports, to the client. This appointment is required by statute.
Registered Office – The address wherein the Registered Agent will receive and forward documents on behalf of the client. Does not need to be, and usually is not, the Principal Place of Business.
Reinstatement – The act of reinstating a Void or Forfeited company by paying all back taxes and penalties, and appointing a Registered Agent going forward.
Renewal – The act of filing formal documents to renew an inoperative or forfeited charter.
Resolution – A document that memorializes the decisions made and actions authorized by a board of directors or the shareholders, or the members of an LLC.
Restated Certificate – Official document issued by the Secretary of State that allows a Corporation to restate its Certificate of Incorporation to reflect all amendments that had been filed in the past. With so many amendments having been filed, it can be quite difficult to understand the present status of the Charter. This filing makes it easier to understand.
Revival – Same as “Renewal.”
Revocation – The official act of revoking a voluntary dissolution so as to allow the entity to continue to conduct business as that entity.
S Corporation – A general or close corporation that elects pass-through taxation treatment with the IRS. Limited to 100 shareholders, and these shareholders must be U.S. resident individuals.
Secretary of State – The State official and agency responsible for business formations.
Service of Process – Time-sensitive documents, such as lawsuits and subpoenas, served upon a registered agent on behalf of a client that typically require a response by the client.
Share – A unit of ownership, or equity, interest in a Corporation.
Shareholder – One who has title to a share, and, therefore, ownership or equity in a Corporation.
Sole Proprietor – An individual who operates a business under his own name, or as a DBA. No limited liability protection.
Statement of Incorporator – A document created by the Incorporator that passes any possible elements of control over the Corporation to the initial Directors.
Statement of Organizer – A document created by the Organizer that passes any possible elements of control over the LLC to the initial Members.
Status – An indicator of whether or not an entity is current with franchise taxes and other filings, as well as registered agent services. A company not in good standing runs the risk of having its corporate veil pierced.
Statutory Trust – An entity created by a grantor through a Governing Instrument wherein assets are placed into a trust, managed by a trustees and advisors, and benefits paid to beneficiaries. In Delaware, the grantor can act as a trustee and/or advisor, and be a beneficiary, and still maintain limited liability protection of any personal assets.
Stock – Same as “Share.”
Stock Amendment – A formal filing with the Secretary of State that amends the original Certificate of Incorporation to change number of authorized shares or change par value. Click here to File Stock Amendment
Stock Certificate – A certificate that evidences a stockholder’s ownership or equity interest.
Stock Transfer Ledger – A record utilized by a Corporation to keep track of the transfer of any stocks.
Stockholder – Same as “Shareholder.”
Subchapter S Corporation – Same as “S Corporation.”
Subchapter S Election – The formal election made by a general or close Corporation to be taxed as a partnership with pass-through taxation. This election is made when IRS Form 2253 is filed in a timely manner.
Tax – A governmental levy on income, such as income tax, or privileges, such as franchise tax.
Transfer Ledger – Same as “Stock Transfer Ledger.”
Treasury Shares – Shares that were issued by a Corporation, and then later reacquired by the Corporation so as to increase the market value of traded shares.
Trustees – Individuals or entities appointed by a Governing Instrument to manage and invest the trust assets.
Trusts – Mechanism wherein assets can be removed from a personal estate in order to preserve them from attack or high taxation.
USA PATRIOT ACT – An official Act of Congress that requires U.S. banks holding correspondent accounts for foreign banks to appoint a registered agent for each correspondent account so as to receive and forward summonses and subpoenas issued by the U.S. Department of the Treasury.
Void – The status given to an entity that has failed to pay its franchise taxes.
Voting Stock – Stock, typically common stock, that entitles the holder to vote at a stockholder meeting.
Zero Coupon Convertible Bond – A bond issued at a deep discount by a corporation that can be converted into stock at a certain price or redeemed for full value at maturity. These bonds do not pay interest.
