Starting a new business can sometimes feel like you need to learn a whole new language. You probably know a lot about the industry you are entering, and you may think you know what some of those business terms are but suddenly you realize there’s a lot you don’t know. What really is an “s corp”? And why does my lawyer look at me funny when I talk about the shares, I own in my limited liability company?
The legal structure you choose – usually either a Corporation or Limited Liability Company (LLC) – will impact your business registration requirements, how much you pay in taxes, and your personal liability. Each structure, Inc. or LLC, has its own set of unique terms that you should know.
You’ve got enough to learn about the new business you are launching, so let’s make it easier for you to understand some of those terms being thrown around.
Articles of Incorporation or Articles of Organization
These are a set of formal documents filed with a government body, typically the secretary of state, to legally document the creation of an entity. In Illinois, this document is called Articles of Incorporation when you are forming a corporation or Articles of Organization when you are forming an LLC.
In some states, for example Delaware, the formal documents filed with a government body to legally document the creation of an entity are called Certificate of Incorporation or Certificate of Organization. The meaning and effect of the documents are the same though the names are different.
By laws of a corporation is a legal document that states the rules and organizational structure your corporation will follow. They establish your policies for appointing directors and officers, holding board and shareholder meetings, making amendments, handling emergency situations, and other important issues.
Many people use the term C corporation (or C-corp) as if it was a different type of entity than an S Corporation. Actually, the entity type is the same. The “C” refers to what section of the Internal Revenue Code the corporation is being taxed under – Subchapter C (as opposed to Subchapter S which applies to S Corporations). In a C-Corp the owners, or shareholders, are taxed separately from the entity, this concept is sometimes referred to as “double taxation”. A C-Corp is the standard default corporation under the IRS rules, so if you didn’t file an election to be taxed under Subchapter S, your corporation is a C-Corp.
Directors of a corporation act as a group known as a board of directors. The board of directors is the corporation’s governing body to ensure that business operations are carried out according to previously laid-down rules and regulations, such as those in the by-laws. They manage the corporation’s business and affairs and has the authority to exercise all of the corporation’s powers. In fact, directors are legally required to put shareholders’ interests ahead of their own. The board plays a supervisory role, overseeing corporate activities and assessing performance. Sometimes corporations only have one director, in that case the duties are the same, but that individual would wear all the hats such as being President, Secretary, and Treasurer.
Franchise tax is a tax that certain business entities have to pay in order to conduct business in some states. Each state determines what businesses must pay its franchise tax and how its calculated. In addition to Illinois, examples of other states that impose a franchise tax include Alabama, Arkansas, California, Delaware, Georgia, Louisiana, Mississippi, Missouri, Minnesota, Nevada, New Hampshire, New York, North Carolina, Oklahoma, Tennessee, Texas, Vermont, and the District of Columbia.
In an LLC, a manager is one who keeps the business running on a day-to-day basis, similar to a corporation’s officers. In an LLC a manager can also be an owner and is called a managing member. Or if you are the only member and manager in your LLC or if all the members are managers, then your LLC can be referred as a Member- Managed LLC. The managerial aspect generally includes having the authority to make decisions and enter into contracts on behalf of the business.
Owners of an LLC are called members. Members can be individuals, trusts or entities (corporations, other LLCs, etc.). There is no maximum number of members. Some LLCs only have one owner which are called single-member LLCs.
A membership interest is the term used to refer to a member’s ownership in an LLC (in a corporation this is referred to as stocks or shares). Unlike stock in corporations where you refer to a number of shares, Typically membership interests are referred to in terms of percentages of ownership. For example, a member owns a 15% membership interest in an LLC rather than a specific number of interest.
The officers of a corporation are key management executives, such as the president, vice president, or CEO, who carry out the daily work of the business. They’re appointed by and report to the board of directors.
A parent company, sometimes called a holding company, is a corporation that has subsidiaries, which are wholly or partially-owned separate businesses controlled by the parent corporation.
A registered agent is an individual or business entity appointed by the corporation or LLC that accepts tax and legal documents on behalf of your business. Typically, a corporation or LLC will choose their corporate counsel as their registered agent. Besides receiving official mail on behalf of your business, the main purpose of a registered agent is to help your business maintain effective corporate compliance by informing you of legal notices (for example lawsuit filings, including complaints or subpoenas) or sending (and sometimes preparing) annual report filings.
Unlike a C Corp, S corporations (S-Corps) are corporations that elect to pass corporate income, losses, deductions, and credits through to their owners or shareholders for tax purposes. This is also known as “pass through taxation.” The “S” also refers to a section of the Internal Revenue Code the corporation has elected to be taxed under– Subchapter S. The Corporation’s must specifically elect to be treated as a S Corp to receive the special tax status and tax advantages.
Secretary of State
In Illinois, the Secretary of State is a governmental department that is the keeper of all state records and laws where and is where you file your articles of incorporation or organization and register your business. While many states use this same term, in a few states the department in charge of business records goes by another name. For example, in Wisconsin you would file with the Department of Financial Institutions, in Delaware and Florida, you would file with their Division of Corporations and in Arizona you would file with the Arizona Corporation Commission Corporations Division.
This is a legally binding contract between a corporation’s shareholders that outlines their rights, responsibilities, and obligations. It also includes information about management and how the company should be operated. A shareholder agreement should also account for what happens in the event of death or disability of any of the owners or shareholders. For an LLC this document is an Operating Agreement.
A shareholder, also referred to as a stockholder, is an owner of the shares of a corporation. In other words, a shareholder is an owner of a corporation holding a certain amount (or all) of the corporation’s shares. A Shareholder can be an individual or another entity, just like a member of an LLC.
The term shares refers to the equity ownership in a corporation, the number of shares owned by a shareholder determines how big of a piece of ownership in a business you have. Shares represent the ownership in one specific company. When a corporation is organized, the articles of incorporation will define the maximum number of shares that a corporation is legally allowed to issue to investors or shareholders. Issued shares are the number of shares owned (issued to) the shareholders of the corporation. For example, your corporation may be organized with 1,000 authorized shares, but may only have issued 500 to its shareholder(s), meaning there are 500 shares essentially in reserve that can be issued later if needed. are authorized to be issued.
A subsidiary company is one that is owned or controlled by a parent or holding company. Usually, the parent or holding company will own more than 50% of the subsidiary company, giving the parent company the controlling share of the subsidiary. When a parent owns all the shares of the subsidiary it is known as a wholly owned subsidiary.
Now that you know the legal terms that may apply, great legal care is the best way to start your business. Whether you’re a solopreneur or sharing ownership of your business, Navigant Law Group can guide your corporate path with ease.
Should you have any questions about starting your business or would like to schedule an initial consultation, please contact Navigant Law Group, LLC at (847) 253-8800 or email us at email@example.com.
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