Business formation glossary

Every term you will meet while forming a company, explained without jargon.

501(c)(3)

Federal tax-exempt status for qualifying charitable organisations.

Section 501(c)(3) of the Internal Revenue Code grants federal income tax exemption to organisations operated exclusively for charitable, religious, educational, scientific or similar purposes. Donations to most of these organisations are tax deductible for the donor.

Forming a nonprofit corporation with a state does not grant this status. The organisation must apply separately to the IRS, usually on Form 1023 or Form 1023-EZ.

Annual Report

A periodic filing that keeps your company in good standing with the state.

Most states require an annual or biennial report confirming the company address, registered agent and, in some states, ownership or officers. There is normally a fee.

Missing the deadline can lead to late penalties, loss of good standing, and eventually administrative dissolution of the company.

Articles of Incorporation

The document that legally creates a corporation with a US state.

Articles of Incorporation, sometimes called a Certificate of Incorporation, create a corporation. They typically state the corporate name, the registered agent, the number of shares the corporation is authorised to issue, and the incorporator's details.

Filing the articles does not by itself finish the setup. Directors still need to be appointed, bylaws adopted, and shares issued at the organisational meeting.

Articles of Organization

The document that legally creates an LLC with a US state.

Articles of Organization is the formation document filed with a state agency, usually the Secretary of State, to create a limited liability company. Some states call it a Certificate of Formation or Certificate of Organization.

It normally lists the company name, the principal address, the registered agent and registered office, whether the company is member managed or manager managed, and the name of the organizer signing the filing. The LLC legally exists from the date the state accepts it.

Authorized Shares

The maximum number of shares a corporation may issue.

Articles of Incorporation state how many shares the corporation is authorised to issue. Issued shares are the portion actually given to shareholders; the rest stay available for future rounds or employee equity.

In some states the authorised share count affects the franchise tax calculation, so a very large authorised number can raise annual cost.

Beneficial Ownership Information (BOI) Report

A federal filing that identifies who ultimately owns or controls a company.

Under the Corporate Transparency Act, certain companies report beneficial ownership information to FinCEN. Reporting scope and deadlines have changed since the rules were introduced, so confirm the current requirement on the FinCEN website before filing.

Where a report is required, it typically asks for each beneficial owner's name, date of birth, address, and an identifying document.

Bylaws

The internal rulebook of a corporation.

Bylaws set out how the corporation is governed: how directors are elected and removed, how meetings are called, what quorum is needed, officer roles, and how shares are transferred.

Bylaws are adopted at the organisational meeting and kept in the corporate records. They are not filed with the state.

C Corporation

A corporation taxed separately from its owners under Subchapter C.

A C corporation pays federal corporate income tax on its own profits. When those profits are distributed as dividends, shareholders pay tax again on their personal returns. This is commonly described as double taxation.

C corporations can have unlimited shareholders, multiple share classes, and foreign owners, which is why venture-backed startups usually use this structure.

Certificate of Good Standing

State confirmation that your company is compliant and active.

A certificate of good standing, sometimes called a certificate of existence or status, confirms the company is registered and up to date with its filings and fees in that state.

Banks, lenders, landlords and other states asking for foreign qualification often request a recent copy.

EIN (Employer Identification Number)

The federal tax identification number the IRS issues to a business.

An EIN is a nine-digit number used to file federal tax returns, run payroll, open a business bank account, and identify the business to third parties. It is free from the IRS.

Applicants with a Social Security Number or ITIN can usually get an EIN immediately through the IRS online application. Applicants without one apply by fax or mail on Form SS-4, which takes longer.

Foreign Qualification

Registering an existing company to do business in another state.

A company formed in one state that carries on business in another usually has to register there as a foreign entity, appoint a registered agent in that state, and pay its fees and reports.

Forming in a low-fee state does not remove obligations in the state where the business actually operates. It often adds a second set of fees.

Form 1120

The US corporate income tax return.

Form 1120 reports a C corporation's income, deductions and tax. Foreign-owned single-member LLCs may file a pro forma Form 1120 purely as a cover for Form 5472.

S corporations file Form 1120-S instead, and partnerships file Form 1065.

Form 2553

The IRS form used to elect S corporation tax treatment.

Form 2553 is the Election by a Small Business Corporation. All shareholders must consent, and the form must be filed within the IRS timing window for the election to apply to the intended tax year.

Late elections can sometimes still be accepted under IRS relief procedures if reasonable cause is shown.

Form 5472

An information return for foreign-owned US entities with reportable transactions.

A US corporation with a 25 percent foreign shareholder, and a foreign-owned US disregarded entity such as a single-member LLC owned by a non-resident, may need to file Form 5472 together with a pro forma Form 1120.

Penalties for not filing are significant. Foreign-owned single-member LLCs also have to keep records supporting the reported transactions.

Franchise Tax

A state charge for the privilege of existing or doing business in that state.

A franchise tax is not a tax on profit. Depending on the state it can be a flat annual amount, a figure based on capital or net worth, or a minimum payment owed even by a company with no income.

Deadlines and amounts vary widely by state, so check the state guide for the jurisdiction you are in.

Operating Agreement

The internal contract between LLC members setting out ownership and rules.

An operating agreement records who owns what percentage, how profits are split, how decisions are made, what happens when a member leaves, and how the company can be dissolved. Most states do not require you to file it, and a few require you to have one.

Without an operating agreement, state default rules apply, which often split everything equally regardless of what the owners intended. Banks frequently ask for it when opening a business account.

Pass-Through Taxation

Business profit taxed on the owners' returns rather than at company level.

LLCs taxed as sole proprietorships or partnerships, and S corporations, generally pass profit and loss through to the owners, who report it on their personal returns.

The company itself may still owe state-level taxes or fees even when federal tax is passed through.

Reasonable Compensation

The salary an owner-employee of an S corporation must be paid before distributions.

The IRS expects a shareholder who works in an S corporation to be paid a reasonable wage through payroll, with employment taxes withheld, before taking additional profit distributions.

What counts as reasonable depends on the role, hours, experience and market rates. Setting it too low is a common audit trigger.

Registered Agent

The person or company that receives legal and state mail for your business.

Every US state requires a formed company to name a registered agent with a physical street address in that state, available during normal business hours. The agent receives service of process, tax notices and annual report reminders.

You can act as your own agent if you have a qualifying address in the state, but the address becomes public record and you must be present during business hours. Many owners use a commercial agent instead.

S Corporation

A federal tax status, not a type of company.

An S corporation is an eligible LLC or corporation that has elected to be taxed under Subchapter S of the Internal Revenue Code by filing Form 2553. Profits and losses pass through to owners and are reported on their personal returns.

Eligibility rules are strict. The company generally must be domestic, have no more than 100 shareholders, have only allowed shareholder types, and have a single class of stock. Non-resident aliens generally cannot be shareholders.