A person or company to which a financial obligation is owed by a debtor. Creditors can be secured or unsecured by particular collateral. Creditors can take different priorities, and can include groups as diverse as a business’ employees, owners, vendors, lenders, third-party victims of accidents (tort creditors), customers, people who have one judgments in court (judgment creditors).
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A court which has jurisdiction over internal affairs for corporations related to equity and injunctive relief. Most business cases in Delaware are decided by this court, which has a reputation for fairness and competence unparalleled in the United States. Expedited remedies are available and none of the cases are subject to juries.
A certificate filed with the Secretary of State to indicate that a mistake was made when an earlier document was filed. A Certificate of Correction cannot be backdated, but it does reference an earlier filed document. Many things can be “fixed” by a Certificate of Correction, for example the certificate setting forth the wrong amount of stock, the wrong name of the company, the wrong manager, or almost anything else previously filed as a Certificate of Formation/Incorporation or amendments thereto. This should be distinguished from a Certificate of Amendment, which can “fix things” from that point forward, but a Certificate of Amendment does not state the reason for the change was an earlier mistake.
A legal entity established by filing a Certificate of Incorporation. It is allowed to borrow money and enter into contracts separate and independent of its stockholders. Stockholders receive distributions and elect directors who run the company through officers (at-will employees) that conduct the day-to-day activities. The stockholders are protected by a “corporate veil” that prevents debts against the corporation from being enforced against individual stockholders in their capacity as stockholders; this is known as “Limited Liability”. The laws in the state of formation govern the internal affairs of the corporation. The rules governing corporations require certain formalities be followed so as to comply with local laws. These include annual meetings, among others.
The liability protection for LLCs and corporations, where individual owners are not personally liable to creditors of their business.
A hand-held “raised seal” that is used to imprint or emboss the corporate name, the year of formation and the state of formation. Although, this stamp is no longer required by law, many corporations choose to still use this, and can provide a Corporate Seal. Sometimes this is requested by banks or other parties to a contract.
A formalized statement that has been voted upon by the corporate directors and/or stockholders at a meeting or by unanimous written consent outside a meeting, typically authorizing a specific corporate action. These typically have recitals of background facts to explain the context for the decision followed by “it is hereby resolved that …” after the resolutions, which continue with “further resolved that…” the corporate secretary attests to this written record and should keep a copy in the corporate minute book.
A 3 ring, slip-cover vinyl binder that holds materials with regards to the corporate governance history of a corporation or LLC. Such documents can include, but are not limited to: company Minutes, Bylaws, Corporate Seal, stock certificates, and stock record.
A U.S. Copyright is a form of intellectual property that protects original authorship of tangible forms of expression, such as music, books, artwork, and computer software for a limited duration. Copyright exists the moment a work is created, although original works can be registered with the United States Copyright Office, part of the Library of Congress, to shift the burden of proof to the infringing party, should a copyright violation arise.
A conversion is when a corporation changes to an LLC, or an LLC changes to a corporation. This is done by filing certain documents (Certificate of Conversion or Articles of Conversion) with the state, depending on the state and which business entity is being converted to. A Certificate of Conversion is often used like a short-form merger. Historically the out of state entity would have to form a new company in the state it wanted to move its domicile and then convert into it. Reincorporating and transferring assets would not work because that would result in a new entity and the history would be lost. A conversion preserves the ongoing operations. If leaving a state and moving a corporate domicile to Delaware to take advantage of the laws in Delaware, it is also important to file a document with the first state of incorporation to let them know the company has moved and to where it has moved and the new name of the company. If a company moves its domicile from one country to anther it is called a domestication.
Common stock is voting shares issued by a corporation. This is the typical definition of “stock”, and the shares issued by the Certificate of Incorporation are, by default, common stock. Most corporations only have one class of stock and this is common stock. The alternative is preferred stock.
A subset of the Board of Directors established in the Bylaws that focuses on a specific subject, such as an executive committee, corporate governance committee, or executive compensation committee.
A closely held corporation simply means that the stock is not publicly traded. This is the case in almost all private corporations.
A type of corporation operated by its stockholders, not needing to have directors. Close corporations went out of fashion with the advent of the limited liability company.
A Board of Directors that is split into different classes, such as directors with different terms of office. This can be a defensive tactic to prevent stockholders from changing the corporate directors too quickly because the new directors are elected periodically, such as a rotating board with 1/3 of the directors every three years.
When a member of an LLC incurs personal debts, the creditor who wins a judgment often tries to collect the judgment. If the debtor is a member of an LLC, often that creditor wants to seize that asset as he is looking to get repaid. However, the creditor is out of luck when it comes to seizing the debtor’s membership interest. Instead of being able to either (1) conduct a hostile take-over and operate the debtor’s LLC or (2) sell the debtor’s membership interest to someone who might want to be a member, the creditor gets only a “non-Voting interest” and right to collect dividends, if the LLC decides to issue dividends. This is a very weak and undesirable remedy for the judgment creditor. This provides the debtor the ability to continue to operate the LLC with virtual impunity. This does not give the creditor an ownership interest and it terminates once the amount owed is paid in full at which time the debtor gets his interest back from the creditor, releasing the charging order. This protection is not afforded to corporate stockholders. This is one significant advantage in the LLC over the corporate form. The attempt of a creditor to drill down and collect the assets of the LLC is sometimes referred to as a “reverse-pierce”: a reference to the corporate veil used to protect owners from business liability, may also be implemented in reverse in the case of an LLC.
A copy of a company’s official corporate filing document(s) or charter and all amendments thereto. This copy is signed and certified by the person(s) who hold official custody of the original documents, such as the Secretary of State.
Under Delaware law, a Certificate of Validation is filed with the Secretary of State to ratify a defective corporate act, such as issuing unauthorized stock.
A document (often one-page) filed with the Secretary of State that sets forth the corporation’s name, Registered Agent, authorized stock, and certain other information which is required or permissible to be included according to the Delaware General Corporation Law. This is the “charter” for the corporation; the corporation is formed as of the time this document is date-stamped received.
A document, issued by the state, that proves a company exists and all Secretary of State fees have been paid, which authorizes it to do business in that state as of the date issued. These are sometimes required by banks before accounts are opened or before loans are taken out.
A document filed with the Secretary of State to create a limited liability company (LLC). In Delaware, the Certificate of Formation usually only contains the name of the LLC, name of the organizer, and the name and address of the Registered Agent. This is the grant of authority by the state government to bring the LLC into existence, like a birth certificate. (Sometime referred to as the “Articles of Formation” or the “Articles of Organization”, depending on the state involved)
A document filed upon the dissolution of an LLC.
A document issued by a particular state to a foreign corporation which grants the corporation the right to do business in that state.
A document filed with the Secretary of State amending the Certificate of Incorporation or Certificate of Formation to add or change the provisions therein.
The cash or property contributed to a company by its owners.
The default tax status of all corporations, which requires filing the “Form 1120” tax return to report its income on a calendar or fiscal year basis. An LLC may elect to be taxed as a C-Corporation by filing a Form 8832. A C-Corporation may carry its losses forward from one tax year to the next. People often think of the C-Corporation as being subject to “double taxation” which is true. However, even with double taxation, there are many options to reduce one’s taxes. This information can be founder under “tax tips” on our website.