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Business Terminology

Business successions take place upon the death or withdrawal of a business owner. Depending on the form of the business, transfers of ownership interests may not achieve a complete change of control. Careful estate planning can minimize problems and facilitate business owners’ goals.

C-Corporations are separate legal entities made up of its shareholders and require more formalities for its operation than any other business structure. A C Corporation is formed by filing Articles of Incorporation at the state level. A C-Corporation provides liability protection to its shareholders. Shareholder liability is generally limited to their personal investment in the corporation. The C-Corporation pays its own taxes at the corporate level and is not a flow-through entity.

Closely held businesses involve a small number of shareholders, and are common forms for family-owned corporations. Due to their low number, shareholders often assume management and direction of the company. This consolidation of responsibilities can lead to specialized legal issues.

Directors’ and officers’ liability occurs when corporate representatives undertake actions that are illegal, unauthorized, or damaging to the business. While the corporate structure offers protection from liability in most instances, some actions or decisions can expose directors and officers to legal risks even if made in the course of business.

Dissolution of a business may happen for a variety of reasons including management deadlock and lack of profitability. Since most business organizations exist in legally-mandated forms, they must use statutory procedures to close their doors. State laws help protect shareholders and creditors of dissolving companies.

Formation and business planning continue long after the articles of incorporation are first written. Businesses must plan for profitability, tax consequences, employment issues, and other concerns. Business forms can change with commercial needs and realities, and savvy businesspeople will keep an open eye for changing risks and opportunities.

Franchising allows a company to use several small businesses to distribute its products and services while maintaining a consistent public image. When a company grants a franchise, it lets another business use and profit from its successful business plan. State and federal laws strike a balance between larger corporations and the small business owner seeking a franchise.

Joint ventures involve two or more companies or individuals in a partnership for a particular purpose. Each contributing member provides capital, expertise, technology, or other special resources to the venture. Special legal liabilities apply to the members of the venture.

Limited liability companies allow their owners to enjoy the tax status of a partnership and the limited liability of a corporation. This relatively new business form is gaining in popularity nationwide, with special state laws addressing formation and operational issues. The members and managers of an LLC may make decisions and take actions without the statutory formalities to which shareholders of a corporation are subject.  Note:  for 501(c)(3) and other non-profit entities, members of limited liability companies may not be natural persons.  Additional Note:  Foreign countries also may not recognize limited liability companies in business trasnactions (e.g., patent licensing, etc.).

Mergers, acquisitions, and divestitures involve structural changes to a company, either through the purchase or the sale of the company or its components. These corporate changes may affect shareholder rights and raise antitrust issues.

Nonprofit and tax-exempt organizations incorporate in order to pursue an organizational goal in the public interest. Nonprofit corporations exist under state law, but must apply to the Internal Revenue Service for tax-exempt status. Although the application process is lengthy, qualifying organizations realize substantial financial benefits. Note:  for 501(c)(3) and other non-profit entities, members of limited liability companies may not be natural persons.

Partnerships can arise in some instances even when the partners do not intend to form a distinct organization. While some types of partnerships do not impart the liability limitations of other business forms, they do have favorable tax implications. Increasingly, state laws provide for new partnership forms that grant more liability protection.

Reorganizations allow bankrupt businesses to regroup in order to stay open and satisfy creditors as much as possible. The commercial bankruptcy option has many advantages over liquidation, which requires selling off many assets and after which the business ceases to exist.

S-Corporations are similar to a C-Corporation that elects a special tax status granted by the IRS. The S-Corporation provides all the liability protection of a C Corporation but does not pay corporate income taxes. The S Corporation is also a flow through entity meaning the individual shareholders report profits and losses on their personal income tax returns.

Shareholders’ rights include certain powers of control over the corporation. The corporation must protect shareholder interests, and perform certain legal duties in order to preserve shareholders’ prerogatives and options.

Tax Identification Numbers (TINs) are tax identifiers assigned by the IRS to the business entity.  In a business that does not have a separate entity structure it is typically the social security number of an individual.

Trade associations connect individual businesses and business groups to work together for common goals. Trade associations provide a forum for brainstorming, political action, and industry standardization.

Trusts are essentially private contracts. A trust agreement is not a public document and there are no filing requirements at the state level. A trust can be a very useful tool when used in combination with one of the business structures listed above for both asset protection and privacy.

Last Modified: December 5th, 2009