Chapter 8. Business Organizations

Articles of Incorporation

(sometimes also referred to as the Certificate of Incorporation or the Corporate Charter) are the primary rules governing the management of a corporation in the United States and Canada, and are filed with a state or other regulatory agency. Meets all statutory requirements.

Private corporation

A business company owned either by non-governmental organizations or by a relatively small number of shareholders or company members which does not offer or trade its company stock (shares) to the general public on the stock market exchanges, but rather the company's stock is offered, owned and traded or exchanged privately. Created by private persons for private (as opposed to public) purposes. Generally are either non profit corporations or for-profit corporations.

Scrip

A certificate representing the percentage of a full share.

Preferred shares

A class of ownership in a corporation that has a higher claim on its assets and earnings than common stock. Preferred shares generally have a dividend that must be paid out before dividends to common shareholders, and the shares usually do not carry voting rights. Have preferential rights.

Limited liability corporation

A corporate form authorized by a growing number of states, intended as a hybrid of the most attractive characteristics of the partnership and corporate forms of organization. A limited liability company (LLC) is the United States-specific form of a private limited company. It is a business structure that combines the pass-through taxation of a partnership or sole proprietorship with the limited liability of a corporation.

Tender offer

A public, open offer or invitation (usually announced in a newspaper advertisement) by a prospective acquirer to all stockholders of a publicly traded corporation (the target corporation) to tender their stock for sale at a specified price during a specified time, subject to the tendering of a minimum and maximum number of shares.

Common shares

A security that represents ownership in a corporation. The residual ownership interest in the corporation.

Security

A share or other interest in the property of the corporation (an equity security) or an obligation of the issuer (a debt security).

Chapter S corporation

A small business corporation which, under certain situations, may elect to have its undistributed taxable income taxed to its shareholders under federal tax laws as if it were a partnership.

Dividend

A sum of money paid regularly (typically quarterly) by a company to its shareholders out of its profits (or reserves).

Professional corporation

A type of close corporation formed by a small group of professionals (lawyers, accountants, doctors) to carry on the practice for which they are licensed. Remain personally liable for their professional activites affecting third parties.

Appraisal remedy

Allows dissenting shareholders to be paid in cash for their shares.

Public corporation

An entity that is created by the state to carry out public missions and services. In order to carry out these public missions and services, a public corporation participates in activities or provides services that are also provided by private enterprise. Created by a government entity to administer government purposes

Bond

An obligation secured by a lien or a mortgage on specific corporate property; the holder of a bond is a secured creditor of the corporation.

Stock subscription

An offer by a would-be shareholder to purchase a specified number of previously unissued shares of the corporation.

Debenture

An unsecured corporate obligation; a holder of a corporate debenture is an unsecured creditor of the corporation.

Cumulative voting

Applies to election of directors only. Each shareholder is allowed to aggregate her votes by multiplying the number of her total shares times the number of director vacancies to be filled.

Apparent authority

Arises when a person leads third parties to believe that another has authority to act on that person's behalf.

Self-executing statutes

Automatically limit a director's liability, subject to stated exceptions.

Trust indenture

Bonds and debentures most often are handled by a financial institution which serves as the trustee under a trust agreement sometimes called a trust indenture between the corporation and the trustee for the benefit of the security holders.

Cumulative-to-the-extent-earned preferred stock

Carries forward and accumulates any unpaid dividends to the extent that the corporation had earnings to pay the dividend but did not pay it.

Voting trust

Created when a group of stockholders transfers legal title to their shares to a trustee in exchange for voting trust certificates.

Insolvency test

Dividend payments are prohibited if the corporation is insolvent (unable to pay debts owed) or would be rendered insolvent by the distribution.

Stock options

Entitles the option holders to purchase a state number of shares of a given class from the corporation at a specific price and usually within a limited period of time.

Insiders

Individuals (directors) who are also officers or employees of the corporation or it affiliates.

de facto corporation

Not a corporation at all, having failed to comply with statutory requirements for organization and existence.

Double taxation

Occurs when corporate profits are taxed at the corporate rate, the after-tax balance is distributed to shareholders as dividends, and the dividend income is taxed again (to the shareholder) at the individual income tax rate.

Business Judgment rule

Officers and directors are not liable for honest, unbiased transactions undertaken with reasonable care, even if it later turns out that the act was ill-advised or was mistaken.

Foreign corporation

One operating in a state that is different from the one in which the corporation was organized or created.

Business corporation

One organized to operate a business enterprise, with profits from the business being distributed to its owners.

Publicly held corporation

One owned by many shareholders and whose stock is publicly traded (bought and sold on the open market). Ex: General Foods or General Motors

de jure corporation

One which has complied with all statutory requirements governing its organization and existence.

Domestic corporation

One which operates in the same state in which it was organized or created.

Silent partner

One who assumes all benefits and burdens of her partner status except in the area of management decision.

Subsidiary corporation

One whose stock is owned entirely or in substantial part by another corporation.

Redeemable shares

Owned by an individual or entity which are required to be redeemed for cash or another such property at a stated time or following a specific event.

Charter option

Permits the articles of incorporation to limit or eliminate a director's liability for damages.

Corporate opportunity doctrine

Prevents corporate officers and directors from diverting business opportunities in which the corporation may have some expectancy, property interest or right, or that in fairness should belong to the corporation.

Cumulative preferred stock

Receives a prescribed dividend for the current year as well as for all prior years in which a preferred dividend was not paid by the corporation before any dividend may be paid for common stock.

Nonparticipating preferred stock

Receives only the preferred dividend state in the articles of incorporation; it does not participate in any other dividend payments made to other classes of stock.

Noncumulative preferred stock

Receives only the prescribed dividend for the current year (prior years need not be paid) before dividends are paid for common stock.

Participating preferred stock

Receives the preferred dividend fixed by the articles and also participate in dividends paid to other classes of stock.

Outstanding shares

Refer to a company's stock currently held by all its shareholders, including share blocks held by institutional investors and restricted shares owned by the company's officers and insiders. Some or all of the authorized shares are issued to shareholders for consideration

Convertible shares

Shares of a given class can be converted into shares of another class on some predetermined ratio.

Stock certificate

Shares of issued stock are represented by stock certificates.

Equity securities

Shares of stocks

Treasury stock

Shares reacquired by the corporation

Stock rights

Short term share options and often are issued in connection with the issuance of debt securities or preferred stock.

Closely held corporation

Sometimes called a close corporation, is one owned by one shareholder or by a small, closely connected group of shareholders.

Nonprofit corporation

Sometimes called a eleemosynary corporation, is one organized typically for educational, religious, or charitable purposes.

Voting agreements

Sometimes calles a pooling agreement. A contract between two or more shareholders concerning the way in which their shares will be voted on certain issues, including election of directors.

Watered stock

Stock issued for something less than the full value established by the board of directors.

Stock warrants

Stock options generally are evidenced by certificates called stock warrants. Long term

Strike suits

Suits filed merely to secure a favorable private settlement rather than to redress a corporate wrong.

Capital structure

The combination of debt securities and equity securities of a particular corporation.

Parent corporation

The corporation owning the majority of shares in a subsidiary corporation

Par value

The dollar amount state as the value of the share in the articles of incorporation.

Bankruptcy insolvency

The excess of total liabilities over total assets.

Proxy

The grant of authority to another to vote a stockholder's shares.

Fractional share

The holder of a fractional share is entitled to a fractional voting right, a fractional dividend, and a fractional distribution if the corporation is liquidated.

Equity insolvency

The inability to pay debts as they become due in the ordinary course of business.

Straight voting

The method by which each share in entitled to one vote on each matter, including one vote for each director position to be filled.

Promoters

The person or persons who plan and organize the business affairs of the intended corporation.

Bylaws

The written rules that supplement the articles of incorporation in governing the corporation's internal affairs.

Blue sky laws

To prevent fraud upon unsuspecting investors by selling them securities that were worth no more than "so many feet of blue sky."

Leverage

Trading on equity. Occurs when the total investment in the business (debt plus equity) yields a higher rate of return than the cost of borrowing money (interest rate).

corporation by estoppel

When a third party deals with a corporation, unaware of its defective organization and relying solely upon the corporation's credit, later discovers the defective incorporation, and attempts to hold with the promoters or the owners personally liable as general partners, the third party is estopped (prevented) from holding owners personally liable.

Preemptive rights

When she has the right to purchase a proportionate share of a new issue of common stock (or of securities that are convertible to common stock) before it is offered for sale to others. Allows an existing shareholder to purchase a new issue of shares in proportion to her present interest in the corporation before any shares are sold to others.