Welcome To Our Legal Dictionary
You may jump directly to Estate Planning or Business & Corporate terms, search for specific phrases in the site search bar, or simply browse the dictionary below.
ESTATE PLANNING TERMS
AB Trust: A trust designed to assure that the personal estate tax exemption of each spouse is used correctly. The surviving spouse should have access to the assets of the deceased spouse during the remainder of the surviving spouse’s lifetime.
Administrator: A person appointed to handle the affairs of the deceased.
Annual exclusion: An exclusion allowing a person to give away a certain amount each year as a “gift” without paying gift taxes.
Assets: Items of value.
Attorney-in-Fact: An individual designated in a power of attorney document, to act as the agent of the person who has executed the document.
Basic Will: A basic will distribute everything to your spouse (if living) or to your children if 18 years or older.
Beneficiary: A person named to receive income or assets from a trust; someone who benefits from a will.
Codicil: A document which serves to modify the original provisions of a prior will.
Deceased / Decedent: A person who has died.
Durable Power of Attorney for Health Care: A written document in which a person names an individual to make health care related decisions for them in the event that they are no longer able to do so for themselves.
Durable Power of Attorney for Property: Same as above, except the decisions being made are property related.
Escheat: An assignment of property to the state because there is no verifiable legal owner.
Estate: Everything of value that a person owned prior to the time of death.
Estate tax: A tax placed on the net value of a decedent’s estate at the time of death.
Executor or Executrix: A person named in the decedent’s will to serve as personal representative in probating the decedent’s estate.
Fair market value: The market price for an asset as would be agreed to by a willing buyer and a willing seller.
Fee simple ownership: Property ownership where one person or entity holds the entire ownership interest.
Fiduciary: A person or institution that is legally responsible for the management, investment, and distribution of funds (i.e. the trustee identified in a trust).
Gift: A voluntary transfer of property for which nothing of value is received in return.
Gifting: An estate planning tool used to implement an estate plan by making gifts to intended successors of assets owned by the person making the gifts.
Grantor: The person placing property in a trust.
The Heir: A person entitled by law to inherit part or all of the estate of an ancestor even if a valid will was not left.
Holographic will: A will entirely handwritten by the testator. The date and all words in the will including the signature must be handwritten by the testator. The signature of the testator may or may not be witnessed.
Irrevocable Trust: A trust that is not amendable or revocable by the grantor. Normally created during a grantor’s lifetime.
Inheritance tax: A tax levied by the county of residence of a person who inherits something from a will. The rate of taxation applied will vary on the size of the inheritance and the relationship between the person who inherits and the deceased.
Intangible property: Property that represents only real value (i.e. bank accounts or promissory notes).
Irrevocable trust: A trust that cannot be changed after it has been established.
Joint tenancy: A form of joint ownership by two or more persons in which each person has an equal undivided ownership interest that passes directly to the surviving joint tenant(s) upon the death of any joint tenant.
Lateral succession: Succession of property ownership in which the property is transferred between members of the same generation.
Letters of Administration: Document issued by the probate court giving the administrator authority to administer the estate.
Letters Testamentary: Document issued by the probate court giving the executor authority to administer the estate.
Liabilities: The amounts owed to another by any person, family, or business (i.e. a mortgage).
Living trust: A trust established during the lifetime of the grantor.
Marital deduction: An unlimited deduction against the estate and gift tax for transfers made outright or in qualifying trusts to the spouse of the transferor.
Personal representative: An executor, administrator, or anyone else who is in charge of a decedent’s property.
Probate: A court procedure used for settling the personal and business affairs of a decedent. The procedure includes proving the validity of a will, transferring property to beneficiaries, and appointing an administrator if there is no valid will.
Revocable trust: A trust that can be changed after it has been established. A revocable trust becomes irrevocable upon the death of the grantor.
Sound mind: To be of sound mind means:
- That the testator understands the act of making a will; and
- That the testator understands what property is being included in the will; and
- That the testator understands the proposed disposition of that property; and
- That the testator knows and recognizes his or her heirs.
Tangible property: Property that is capable of being touched (i.e. land).
Testator: One who writes and signs a will.
Trustee: A person named to manage property for the benefit of the beneficiary.
Undivided interest: The interest in property owned by each joint tenants. Each tenant is entitled to an income share proportional to his ownership interest. If the property is sold, the proceeds are shared based on the ownership shares held by each tenant.
Will: A declaration made by a person, prior to death, that states how that person wants their estate to be divided.
BUSINESS LEGAL TERMS
Annual Meeting of Shareholders Nearly all states require a corporation to hold an annual meeting of shareholders at which time directors are elected and other corporate issues are voted on.
Articles of Incorporation While different states may refer to this as a charter or a certificate of incorporation, the articles of incorporation, which conform to state law, must be filed with the proper state authorities and must convey the purpose of your corporation, the name, the primary place of business, names of directors, and the amounts and types of stock it is authorized to issue.
Articles of Organization A document filed with the Secretary of State that creates a limited liability company. It can include the name of the company, its purpose, the principal address of business, the Registered Agent’s name and address, duration of the company, and its members.
Asset protection A form of financial self-defense which places assets beyond the reach of creditors.
Assets Anything owned with monetary value. This includes both real and personal property.
Assumed Name A name under which a corporation conducts business that is not the legal name of the corporation as shown in its articles of incorporation. Assumed names (also called fictitious name and Doing Business As) are typically filed at the county level with the county recorders office. A corporation can use multiple assumed names.
Authorized Shares/Stock The total number of shares a corporation is authorized to issue. This number is specified in the articles of incorporation. All of the shares authorized need not be issued to shareholders, the corporation can have unissued shares that can distributed at a latter time.
Bylaws Bylaws are the rules and regulations adopted by a corporation for its internal governance. It usually contains provisions relating to shareholders, directors, officers and general corporate business. At the corporation’s initial meeting the bylaws are adopted. Bylaws are a private document not filed with any state authority. Bylaws are more flexible than the articles of incorporation because they are easier to amend.
Business Entity An organization that possesses a separate existence for tax purposes. Some types of business entities include corporations and foreign corporations, business trusts, limited liability companies, and limited partnerships.
Business Judgment The rule states that directors of corporations will not be held personally liable for unwise business decisions providing that the directors made an informed decision and that decision was not tainted by self-interest.
Capital Gains or Losses Gains or losses realized from the sale or exchange of capital assets. The amount is determined by calculating the difference between an asset’s purchase and sale price.
C Corporation A C corporation is simply a standard business corporation. It is called a C corporation because it is taxed under subsection C of the IRS code. Calendar year The accounting year beginning January 1 and ending on December 31.
Certificate of Authority Is a document issued by the proper state authority to a foreign corporation granting the corporation the right to do business in that state.
Certificate of Organization The document that creates an LLC according to the laws of the state. This must be filed and approved by the state.
Certificate or Articles of Incorporation The document that creates a corporation according to the laws of the state. This must be filed and approved by the state.
Close Corporations A close corporation is a corporation that possesses the following traits: a small number of shareholders; no ready market for the corporation’s stock; and substantial participation by the majority shareholders in the management of the corporation. Some states have close corporation statutes. This kind of corporation typically has 30 to 50 stockholders and is a good match for businesses in which the majority of stockholders is actively involved in the management of the company.
Common Stock The primary stock of a corporation. This stock gives shareholders the right to participate in management of the corporation and give the shareholder a proportionate share of the dividends.
Consolidation When two corporations combine, creating a third. Corporation A business formed and authorized by law to act as a single entity, although it may be owned by one or more persons. It is legally endowed with rights and responsibilities and has a life of its own independent of the owners and operators. The owners are not personally liable for debts or obligations of the corporation.
Corporate Record Book Maintaining the proper records is very important to assure limited liability to corporate shareholders. The corporation should have a record book which contains a copy of the articles of incorporation, bylaws, initial and subsequent minutes of directors and shareholders meetings and a stock register.
Cumulative Voting This method of voting is intended to create adequate representation of minority shareholders. Cumulative voting allows shareholders to aggregate their votes in favor of fewer candidates than there are slots available.
Deceptively Similar A name so similar to another name that the two become confused in the public eye.
Default Rules Statutory rules that take effect in the absence of contrary provisions in an Operating Agreement.
Directors Directors are elected by the shareholders. They manage or direct the affairs of corporation. Typically, the directors make only major business decisions, major policy changes and monitor the activities of the officers. They are the people who primarily manage the corporation.
Dissolution Formal statutory liquidation, termination and winding up of a business entity.
Distribution Payment of cash or property to a member, shareholder or partner according to his or her percentage of ownership.
Double Taxation Occurs when corporations pay tax on corporate profits and shareholders pay income tax on dividend or distributive income.
Doing Business As (DBA) A “DBA”, also known as an “assumed name”, is typically completed by making a filing at the county level where the business is located. This filing does not change the official name of the corporation; however, it allows the company to use additional names.
Dividend A dividend is a distribution of money or property paid by the corporation out of the corporation’s profits to shareholders. Dividend payments are subject to double taxation, the corporation pays tax on its profits and the dividend recipient must pay income taxes on the dividend payment, the same money is taxed twice. The directors of the corporation decide if a dividend payment is to be made and it can only be made if the corporation has profits.
Domestic Corporation A corporation is a domestic corporation in the state where it has incorporated.
Double Taxation Corporations that are treated as a separate legal taxable entity for income tax purposes. Therefore, corporations pay tax on their earnings. If corporate earnings are distributed to shareholders in the form of dividends, the corporation does not receive the reasonable business expense deduction, and dividend income is taxed as regular income to the shareholders. Thus, to the extent that earnings are distributed to shareholders as dividends, there is a double tax on earnings at the corporate and shareholder level. S corporations and LLCs are pass-through entities which are not subject to the double tax.
Equity The ownership of a shareholder in a corporation.
EIN or Employer Identification Number Also known as a Tax ID Number this is the number given to your business by the IRS and is used for tracking all financial activities, including taxes.
Federal Tax Identification Number This is a number assigned to a corporation or other business entity by the federal government for tax purposes. Banks generally require a tax identification number to open bank accounts. The federal tax identification number is also known as the Employer Identification Number (EIN).
Fictitious Business Name A name other than the registered name under which a company may do business as long as it is not used for fraudulent purposes.
Fiscal Year Any twelve-month period used by a business as its fiscal accounting period.
Foreign Corporation A corporation formed in one state or country but conducting some or all of its business in another state or country.
Foreign LLC A limited liability company formed in one state or country but conducting some or all of its business in another state or country.
Franchise Tax A tax on the privilege of carrying on business as a corporation or LLC in a state. The value of the franchise tax may be measured by amount of earnings, total value of capital or stock, or by amount of business done. In some states, like California, the franchise tax is simply an income tax.
Free Transfer of Interests The ability to transfer a membership interest to a non-member without consent of the other members.
General Partner The partner who accepts personal liability and is responsible for the daily management of a partnership.
Gift For tax purposes, the IRS recognizes as a gift any voluntary transfer of property without consideration whose value does not exceed the allowable annual exclusion. Currently at around $13,000.
Incorporate To form a corporation or to organize and be granted status as a corporation by following procedures prescribed by law.
Incorporator The person who signs the Articles of Incorporation upon petitioning the state for a corporate charter.
Indemnification Financial or other protection provided by an LLC or corporation to its members, managers, directors, officers and employees, which protects them against expenses and liabilities in lawsuits alleging they breached some duty in their service to, or on behalf of, the company.
Insolvency Being unable to pay one’s debts because liabilities exceed assets.
IRS Form 1023 This form is used to apply for tax-exempt status with the IRS. This is mainly used for Non-Profits.
IRS Form SS-4 This form is used to apply for a federal tax ID number. You will receive this form in your corporate kit.
IRS 2553 This form is used to apply for S corporation status
Issued Shares The number of shares actually sold by the corporation.
Limited Liability The protection provided in LLCs and corporations that frees owners from being personally liable for debts and obligations of the company, with a few tax related exceptions. With company or corporate debt, general creditors cannot attach the owners’ homes, cars and other personal property.
Limited Liability Company A business entity created by legislation that offers its owners the limited personal liability of a corporation and the tax advantages of a partnership.
Limited Partner A partner who contributes capital or property to the partnership and enjoys limited liability to the extent of his or her investment but who may not participate in the management of the partnership.
Limited Partnership A partnership in which the duties and obligations of the partners are divided between “general partners” and “limited partners.”
Manager An LLC may be operated by a group of managers who act much like a board of directors. If an LLC is to be controlled by managers this fact must be stated in the articles of organization.
Member One who contributes capital, property or services to an LLC and in return, receives a membership interest in the company.
Membership Certificate Written instrument evidencing a percentage, interest or unit of ownership of a Limited Liability Company.
Membership Interest A member’s ownership of an LLC is represented by “interests” just as a partner has an interest in a partnership and shareholders own stock in a corporation.
Merger A merger occurs when two corporations join together into one, with one corporation surviving and the other corporation disappearing. The assets and liabilities of the disappearing entity are absorbed into the surviving entity.
Minority Owner One who owns or controls less than 50 percent of the stock in a corporation, partnership or LLC.
Minutes A written record which details the events of the corporation or LLC. These records should be kept in the corporation’s or LLC’s record book.
Name Reservation The name of a corporation or LLC must be distinguishable on the records of the state government. If the name is not unique, the state will reject the articles of incorporation or articles of organization (for LLCs). A name can be reserved, usually for 120 days, by applying with the proper state authorities and paying a fee.
No-Par-Value Stock Stock with no minimum value. If the stock is no-par stock then the amount of stated capital is an arbitrary amount assigned by the board of directors.
Nonprofit Corporation People in nonprofit corporations come together to either benefit members of an organization or for some public purpose, such as a hospital, environmental organization or literary society. Nonprofit corporations can make a profit, but the business cannot be designed primarily for profit-making purposes, and the profits must be used for the benefit of the organization or purpose that inspired the corporation. These corporations can apply for tax-exempt status at both the federal and state level. Not-for-profit corporations must file not-for-profit articles of incorporation with the state.
Officers The directors appoint officers. They manage the daily affairs of the corporation. A corporation’s officers usually consist of a president, vice-president, treasurer and secretary. In most states, one person can hold all of these posts.
Operating Agreement A statement of the general principles of a limited liability company which combines information from the Articles of Organization with resolutions passed unanimously by members. It details economic and management arrangements as well as members’ rights and responsibilities.
Organizational Meeting The initial meeting where the formation of the corporation or LLC is completed. At the organizational meeting a number of initial tasks are completed such as: the articles of incorporation/organization are ratified, the initial shares or interests are issued, officers or managers are elected, bylaws or operating agreement are approved, and a resolution authorizing the opening of bank accounts is passed. If the initial directors or managers are named in the articles of incorporation or organization, they can hold the organizational meeting.
Parliamentary Procedure Rules such as “Roberts Rules of Order,” which govern stockholders’ meetings, directors’ meetings, etc.
Partnership A partnership is owned by two or more people, who are personally liable for all business debts and obligations. A general partnership can come into existence without the need to file any formal papers with any state official.
Par-Value The stated minimum value of a share stock. Stock must be sold for at least this value or the owner of the stock can face liability. With low par value stock or no par value stock this liability is minimized.
Pass-Through Taxation The income to the entity is not taxed at the entity level; however, the entity does complete a tax return. The income or loss as shown on this return is “passed through” the business entity to the individual shareholders or interest holders, and is reported on their individual tax returns. S corporations and LLCs are both pass-through tax entities.
Piercing the Corporate Veil If corporate or company formalities are not followed, it is possible that the business entity will not protect its owners from business debt and other business liabilities. Keeping proper records and holding regular meetings help solve this possible problem.
Preemptive Rights Rights delineated in the articles of incorporation granting shareholders the first opportunity to buy a new issue of stock in proportion to their current equity percentage. The shareholder has the right to buy the new issue of stock, but is not required to make the purchase. If the shareholder elects not to exercise this right, the shares can be sold on the open market.
Preferred Stock Stock which generally provides the shareholder with preferential payment of dividends but does not carry voting rights. If a corporation is to have preferred stock, this fact must be stated in the articles of incorporation.
Professional Corporation A legal structure, typically formed by licensed professionals such as lawyers, doctors, and accountants. In this kind of structure, a professional is not free from personal liability for his or her own negligence. Unlike a general partnership, however, owners are not personally liable for the malpractice of other owners.
Pro Rata Members receive rights or dividends based upon percentage of ownership.
Proxy Authorization by a stockholder or member allowing another to vote his shares of stock or interests.
Publicly Owned Corporation One whose stock is owned by more than 25 stockholders and is regulated by the Securities and Exchange Commission.
Quorum The minimum attendance required to conduct business at a meeting. Usually, a quorum is achieved if a majority of directors are present (for directors meetings) or outstanding shares are represented (for shareholder meetings). The percentage needed for a quorum may be modified in the bylaws.
Registered/Resident Agent According to state laws, corporations and LLCs located out of state must have a registered agent. This Agent must be named in the articles of incorporation and be located in the state of incorporation or organization in order to receive all legal notifications. The registered agent will receive important legal and tax documents, such as franchise tax forms and annual report forms. Also known as a Statutory Agent.
Registered Office The office named in the articles of incorporation. The registered office must be where the registered agent is located, and need not be the principal office or place of business of the corporation.
Resolution A resolution is a formal decision of the corporation which has been adopted by either the shareholders or the board of directors.
S-Corporation An S corporation, which is limited to 75 or fewer shareholders, provides the benefits of incorporation, but it eliminates “double taxation,” which is when the profits of a corporation are taxed first as income to the corporation and then second as income to the shareholders when profits are distributed as dividends.
Service Business A business that sells service or advice instead of a tangible product.
Share An interest in a corporation. The total ownership of a corporation is divided into shares of stock.
Shareholder Any holder of one or more shares in a corporation. A shareholder usually has evidence that they are a shareholder; this evidence is represented by a stock certificate.
IRS Form 1023 A business owned and managed by one person, who is personally liable for all business debts and obligations. For tax purposes, the owner and his or her business are one entity, meaning that business profits are reported and taxed on the owner’s personal tax return.
Start-up Venture A new business having no track record.
State Statutes Laws created by a state legislature.
Stated Capital The par value of shares multiplied by the number of shares outstanding. The amount of stated capital may effect the ability to pay dividends.
Stock An equity or ownership interest in a corporation, measured in shares. Ownership of shares is demonstrated by stock certificates.
Stock Certificate Written instrument evidencing a share in the ownership of a corporation.
Stockholder A holder of one or more shares of the stock of a corporation. A stockholder may be called a “shareholder.”
Stock Transfer Book A record book which lists the owners of shares of stock in a corporation.
Subsidiary A corporation owned by another corporation.
Treasury Shares Shares of stock which were issued, and later acquired by the corporation.
Ultra Vires Traditionally, the purpose of a corporation was closely spelled out in its articles of incorporation. If the corporation acted beyond its described purposes these actions were unenforceable against the corporation or by the corporation. However, most modern statutes allow corporate purposes to be any lawful activity.
Unanimous Written Consent Requirement that all persons entitled to vote agree on a provision prior to its approval.