15 U.S Business Incorporation Terms Every Founder Should Know

Founders may question the necessity of incorporating their business in the United States. They may wonder if the benefits of forming a corporation in Delaware outweigh the potential drawbacks.

However, the most significant advantage of incorporating a U.S. entity such as a C-Corp is that parties involved can limit their liability to only their investment in the business. In other words, investors and founders can only lose as much as they put in. This, coupled with the fact that investors generally prefer Delaware incorporations, makes registering your startup in Delaware a no-brainer for founders looking to raise.

Here’s a list of 15 relevant business incorporation terms every founder should know before registering in the U.S

1. C Corporation

A C corporation, also known as a general business corporation, is the most common corporate structure in the United States. C corporations are so named because they are governed and taxed under Subchapter C of the U.S. Internal Revenue Code.

Key features of a C corporation include:

• Separate legal entity. A C corporation is treated as a separate legal entity from its shareholders for tax and liability purposes.
• Unlimited shareholders. C corporations can have an unlimited number of shareholders, allowing for large public stock offerings.
• Double taxation. C corporations pay corporate income tax on profits and distributions such as dividends are taxed again at the individual shareholder level.
• Complex compliance. C corporations tend to have more complex and expensive compliance requirements due to SEC regulations if publicly traded.

2. Limited Liability Company (LLC)

A limited liability company, or LLC, is a legal business structure created according to the rules and regulations of the state in which it is registered. LLCs combine beneficial elements of both corporations and partnerships. 

Similar to a corporation, an LLC shields its owners and members from legal liabilities and lawsuits against the business. Like a partnership, an LLC is a pass-through entity for tax purposes, meaning profits and losses are passed to members who report them on their personal tax returns. 

LLCs offer business owners flexibility in governance and operations. Owners, called members, can choose to be actively involved in management or appoint professional managers to run day-to-day activities. LLCs are ideal for small businesses, startups and ventures with multiple owners. 

However, forming an LLC requires completing certain legal steps and complying with ongoing reporting requirements set by state laws. Overall, LLCs provide an attractive option for business entities seeking to balance liability protections, tax efficiency and operational flexibility.

You can learn more about an LLC here.

3. S Corporation

An S corporation is a company that meets specific requirements and files paperwork with the Internal Revenue Service (IRS) to be taxed under Subchapter S of the U.S. tax code. This provides benefits like tax savings and administrative simplicity.

To qualify for S corporation status, a business must meet certain criteria: it must be a domestic corporation, have 100 or fewer shareholders, only issue one class of stock, and meet other restrictions.

Once S corporation status is elected, the company itself generally pays no income tax. Instead, the business’s profits and losses pass through to shareholders, who report their proportionate share on their personal tax returns. This pass-through taxation allows S corporations to avoid double taxation that regular “C corporations” face.

S corporations provide tax advantages for small businesses and their owners. However, they come with complex regulations and administrative requirements. Staying in compliance with S corporation rules is crucial to maintain tax benefits.

Overall, S corporation status can be a useful option for businesses seeking to minimize taxes while passing profits directly to owners.

4. Articles of Incorporation

This is the foundational legal document required to form a corporation. Also known as a certificate of incorporation or charter, articles of incorporation establish the corporation as a separate legal entity with perpetual existence.

      The articles of incorporation filed with a state authority typically include:

• The corporate name. The name must be unique and distinguish the corporation from others already registered in that state.
• The purpose and nature of business. The articles outline the type of business the corporation intends to conduct.
• Authorization of stock. The articles specify the total number of shares the corporation is authorized to issue and any classes of stock.
• The registered agent and office address. The articles name an individual or company to legally represent the corporation and receive official documents on its behalf.
• The names and titles of the initial directors. The articles name the individuals who will manage the corporation and set its initial policies.
• The name and address of the incorporator(s). The incorporator is the individual who files the articles of incorporation on behalf of the corporation.

Once accepted by the state, the articles of incorporation confer important legal rights and responsibilities on the new corporation. The articles also serve as a contract between the state, the corporation and its shareholders.

Any substantial changes to the articles of incorporation after formation require shareholder approval. The articles help define and legally establish the corporation from the outset.

5. Tax-Exempt Organization

A tax-exempt organization is a nonprofit entity that is not required to pay federal income taxes due to its approved tax-exempt status under Section 501(c) of the U.S. tax code. Numerous types of nonprofits can qualify for tax exemption, including charities, religious organizations, educational institutions, foundations, civic leagues and others.

To obtain tax-exempt status, an organization must apply to the Internal Revenue Service (IRS) and demonstrate that it meets the requirements for exemption. These generally include operating exclusively for exempt purposes, not allowing earnings to benefit private interests, and not engaging in political campaign activities.

6. Acquisition

What is an Acquisition?

An acquisition occurs when one company, referred to as the acquirer, purchases another company, referred to as the target company. The acquirer gains control of the target company by:

• Purchasing a majority stake in the target company – typically more than 50% of its outstanding shares. This allows the acquirer to control the board of directors and have a say in key decisions.

• Conducting an asset purchase, where the acquirer buys all or a majority substantially all of the target company’s assets. Though less common, asset purchases allow the acquirer to selectively choose which assets and liabilities they wish to take on.

Acquisitions allow companies to expand their business more quickly than organic growth.

7. Equity Financing

Equity funding is a means for companies to raise capital by issuing new shares and selling partial ownership stakes to investors. When a company issues new shares and sells them to equity investors, it receives cash in exchange – this cash then becomes part of the company’s funds to use for its operations and growth initiatives. 

Equity funding allows companies, especially startups, to bring in capital without taking on debt and the associated interest payments. However, equity investors gain partial ownership of the company and a say in how it is run. Equity funding also dilutes existing shareholders’ stakes. Thus, companies must carefully weigh the pros and cons of equity financing based on their specific needs and circumstances.

8. Debt Financing

Corporate debt financing refers to an approach by which corporations raise funds through the issuance of debt instruments rather than relinquishing ownership in the form of equity. By offering bonds or taking on loans, corporations are able to procure capital from external investors while retaining full control and ownership of their business. Unlike equity financing which involves giving up partial ownership of the company to new shareholders, debt financing allows the corporation to maintain complete autonomy over decisions and governance.

9. Trademark

A trademark is an exclusive sign like a word, phrase, symbol or design that identifies the source and origin of a company’s products or services. Trademarks distinguish goods and services from those of competitors and build customer loyalty and recognition for the brand.

Trademarks provide the brand owner with the exclusive right to use the mark in relation to specified products or services. This helps prevent consumer confusion and protects the brand’s goodwill and reputation.

10. Administrative Dissolution

Administrative dissolution is a process whereby a state authority involuntarily dissolves a corporation or LLC for failing to meet certain legal requirements.

The most common triggers for administrative dissolution are:

• Failure to file an annual report and pay required fees on time. All registered businesses must file an annual report and pay applicable fees to maintain their legal status.
• Failure to maintain a registered agent or office address. Most states require businesses to have an in-state registered agent and address for legal correspondence.
• Failure to pay franchise taxes and other fees. Many states assess franchise taxes that businesses must pay annually to maintain their legal status.

If a business fails to rectify the issues leading to administrative dissolution within a specified period, often one to two years, the state authority will formally dissolve the business and revoke its legal status.

11. Buy-Sell Agreement

A shareholder agreement is a legal contract between the shareholders of a private corporation and the corporation itself. Shareholder agreements govern the rights and obligations of shareholders, as well as the corporation’s operations.

Shareholder agreements are common in small, closely-held corporations with a limited number of shareholders who know each other well. They allow shareholders to tailor the corporation’s governance to their specific needs and objectives.

12. Franchise Tax

Franchise tax is a tax levied on corporations and limited liability companies (LLCs) in exchange for the right to conduct business in Delaware State, one of the common business destinations for founders expanding to the United States.

The key dates and deadlines for filing the Delaware franchise tax depend on the type of business entity.

For corporations, the franchise tax is due on March 1st of each year. 

For LLCs, the franchise tax payments are due on June 1st of each year.

Penalties for late payment or non-payment of the Delaware franchise tax can include interest charges, late fees, and the revocation of the company’s good standing with the state.

13. Derivative Suit

A derivative claim is a legal action initiated by an investor on behalf of a company to defend the company from harm caused by wrongdoings against it. Such legal action seeks to protect all shareholders by having the responsible parties remedy or compensate for the wrongful acts. Derivative suits aim to uphold fiduciary duties and good governance standards that companies and their boards have towards investors and shareholders

14. Hostile Takeover

A hostile takeover is an acquisition manoeuvre in which an acquiring company seeks to take control of a target company against the wishes of the target firm’s management and board. In a hostile takeover, the acquiring company goes directly to the target company’s shareholders and tries to convince them to approve the takeover. 

This circumvents the target company’s board, which typically opposes hostile bids due to concerns over loss of control and strategy disruption.

15. Friendly Takeover

A friendly takeover is an instance where one company willingly obtains a controlling stake in another firm through the purchase of shares. Friendly takeovers allow companies to expand into new markets, obtain new technologies and products, eliminate competitors, and achieve economies of scale.