Week 13: Business Structure Vocab

Advances - In partnerships, loans by the partners to the partnership; makes the partner a
creditor of the partnership.
Alter Ego Theory - Theory used for disregarding the corporate protection of limited liability for shareholders; results when individuals treat the corporation’s properties and accounts as their own and fail to follow corporate formalities.
Appraisal Rights - Rights of dissenting shareholders after a merger or takeover to be paid
the value of their shares before the takeover or merger.
Articles of Incorporation - Organizational papers of a corporation; list the company’s
structure, capitalization, board structure, and so on.
Articles of Limited Partnership - Contract governing the rights and relations of limited
partners.
Articles of Organization - Contract governing the rights and relations of limited partners.
Audit Committees - Committee of the board responsible for oversight of company financial statements.
Board of Directors - Policy-setting governing group of a corporation.
Business Judgment Rule - Duty of care imposed upon members of corporate boards that
require adequate review of issues and information, devotion of adequate time to deliberations, and hiring of outside consultants as necessary for making decisions; the standard does not require foolproof judgment, only reasonable care in making the judgment.
Bylaws - Operating rules of a corporation and its board; usually describe the officers and
their roles and authority, along with meeting procedures and notices.
Common Stock - Type of shares in a corporation that usually have voting rights.
Corporate Opportunity Doctrine - A business proposition or investment opportunity that a
corporation would have an interest in pursuing; precludes directors from taking a profit
opportunity when the corporation would have an interest.
Corporate Veil - The personal liability shield; the corporate protection that entitles
shareholders, directors, and officers to limited liability; can be pierced for improper conduct of business or fraud.
Corporations - Business entity created by statute that provides limited liability for its owners.
Cumulative Preferred Stock - Type of ownership in a corporation that gives the stock
owners preference in the distribution of dividends and also guarantees earnings each year; in the event those earnings are not paid, they are carried over or accumulate until they can by paid.
Dissenting Shareholder - Shareholder who has objected to a merger or consolidation and
votes against it; is entitled to receive the value of her shares before the merger or
consolidation.

Dissolution - In partnerships, occurs when one partner ceases to be associated with the
business; in corporations, the termination of the corporate existence.
Dodd-Frank Wall Street Reform and Consumer Financial Protection Act - Federal law
over 2000 pages in length that increases and modifies the regulation of financial markets,
investment firms, securities analysts, rating agencies, corporate boards, and consumer credit (including mortgage disclosures).
Domestic Corporations - A term used to describe a corporation in the state in which it is
incorporated.
Fiduciary - Position of trust and confidence.
Foreign Corporations - A corporation in any state except the state in which it is
incorporated.
Freeze-Out - Merger undertaken with the objective of eliminating minority shareholders.
General Partner - Partner in a general or limited partnership whose personal assets are
subject to partnership creditors in the event of nonpayment of partnership debts.
Incorporators - Individuals who sign the incorporation papers for a newly formed
corporation.
Initial Meeting - First meeting of a corporation’s organizers after the state provides
certification that the corporation exists.
Joint Ventures - A partnership for one activity or business venture.
Limited Liability Company (LLC) - A business entity with limited liability but management
participation permitted by all; created by statute.
Limited Liability Partnership - Partnership in which all partners have limited liability;
statutory creature with strict formation requirements.
Limited Partner - Partner in a limited partnership who has no personal liability and can only lose his investment in the partnership; must be formed according to statutory requirements; cannot participate in the firm’s management.
Limited Partnership - Type of partnership in which some partners have unlimited liability
(general partner) and other partners only have their investments at risk in the business
(limited partners); must follow statutory procedures to properly create a limited partnership.
Limited Partnership Agreement - Contract governing the rights and relations of limited
partners.
Model Business Corporation Act (MBCA) - Uniform law on corporations.
Novation - Process of reworking a contract to substitute parties or terms, so that the old
contract is abandoned, and the new contract becomes the only valid contract.
Partnership by Estoppel - The conduct of two or more parties leads others to believe a
partnership exists. Arise when others are led to believe there is a partnership.
Partnership by Implication - A partnership that exists because the parties agree to share
profits in the absence of a formal agreement.

Pooling Agreement - Agreement among shareholders to vote their stock a certain way.
Preferred Stock - Usually nonvoting shares of a corporation entitling its holders to dividend preference above the common shareholders.
Professional Corporations - A statutory entity that permits professionals such as lawyers
and doctors to incorporate and enjoy limited personal liability on all debts except for those arising from malpractice.
Proxy - Right (given in written form) to vote another’s shares.
Publicly Held Corporations - A corporation owned by shareholders outside the officers and employees of the firm.
Ratification - A principal’s recognition of a contract entered into by an unauthorized agent.
Revised Uniform Partnership Act - Newest uniform revision of law on limited partnerships.
S Corporation - A form of corporation for tax purposes that permits the direct flow-through
of income and losses to the shareholders; no income tax on the entity and no personal liability for the owners for business debts.
Sole Proprietorship - Method of business ownership in which one person owns business,
receives all profits, and is personally liable for all debts.
Transfer Restrictions - Limitations on the resale of shares of a corporation.
Uniform Partnership Act (UPA) - Uniform law adopted in 49 states that governs the
creation, operation, and termination of general partnerships.
Voting Trust - Arrangement among shareholders to gain uniform voting and some power by signing over voting rights on shares to a trustee; shareholders still get dividends, but trustee votes the shares; must be in writing and recorded with the corporation.
Watered Shares - Shares for which par value was not paid; shareholder is liable for the
difference between what was paid and the par value per share.

Asset Acquisition - Form of takeover in which another firm buys all the assets of a firm and gains control through control of the firm’s property. If structured property, the acquirer avoid liability for the debts of the acquired business.
Blue-Sky Law - State law regulating sale of securities.
Blue-Sky Laws - State laws regulating the sale of securities.
Comment/Deficiency Letter - SEC response to registration filing; requires additional
information or clarification on proposed offering.
Consolidation - A form of merger in which two firms unite and become known by a new
name.
Due Diligence - Under the Securities Act of 1933, a defense for filing a false registration
statement that requires proof that the individuals involved did all they could to uncover the truth and could not have discovered the false statements despite a thorough review of all relevant information.
Exemption - Securities and transactions that do not have to be registered with the SEC under the Securities Act of 1933.
Foreign Corrupt Practices Act (FCPA) - Federal law prohibiting bribes in foreign countries
and requiring the maintenance of internal controls on accounting for firms registered under the Securities Exchange Act of 1934.
Howey Test - Created by the U.S. Supreme Court; it defines a security as an investment in a common enterprise that earns profits from the efforts of others.
Hostile Takeover - A takeover not favored by the target’s management.
Insider Trading and Securities Fraud Enforcement Act of 1988 - Act increasing the
Securities Exchange Act of 1934 penalties for insider trading.
Insider - A corporate officer or director or other executive with access to corporate
information that is not available to the public.
Material Misstatement - A statement of fact that would influence an individual’s decision to buy or sell.
Merger - Process of combining firms so that one firm becomes a part of the other and only one firm’s name is retained.
Merit Review - Process at the state level of reviewing securities registrations to determine whether they are good investments.
Prospectus - A document describing the nature of securities and the company offering them.
Proxy Solicitations - The process of seeking voting rights from shareholders.
Red-Herring Prospectus - A prospectus issued before the effective date of a securities
registration statement; permissible to release these before the registration statement is

effective so long as a disclaimer that it is not an offer to sell securities is noted in red on the prospectus.
Registration Statement (S-1) - A filing with the SEC disclosing all the necessary
information about a securities offering under the 1933 Securities Act.
Rule 10b-5 - SEC rule prohibiting fraud in relation to the sale of securities.
Section 10(b) - Antifraud provision of the Securities Exchange Act of 1934.
Section 16 - Section of the Securities Exchange Act of 1934 that regulates sales and
purchases of shares by directors, officers, and 10 percent of shareholders.
Securities Act of 1933 - The federal law governing the initial issuance and sale of securities to the public.
Securities Exchange Act of 1934 - The federal law governing the secondary sales of
securities, the markets, and the firms dealing with securities.
Securities Exchange Act of 1934 - The federal law governing secondary sales of securities, the markets, and the firms dealing with securities.
Securities and Exchange Commission (SEC) - Federal agency responsible for enforcement of federal securities law.
Securities - Investment of money in a common enterprise with profits earned largely from
the efforts of others.
Short-Swing Profits - Profits made by corporate insiders during a period of less than six
months between purchase and sale.
Takeover - A takeover of one firm by another firm when the target firm solicits or agrees to the takeover.
Tender Offer - Offer to more than 10 percent of the shareholders of a firm for the purchase of their shares; generally part of a takeover effort.
Tippee - Party who receives inside information about a corporation or its securities and uses the information to trade securities.
Tombstone Ad - Ad run in newspapers announcing an upcoming securities offering;
permissible after the registration statement is filed but not yet effective; must indicate it is
not an offer for sale.
Williams Act - Federal law governing the tender offer process.
10-K Form - Annual report filed with the SEC; required of all 1934 Act firms.
10-Q Form - Quarterly report filed with the SEC; required of all 1934 Act firms.
8-K Form - A filing required by the SEC under the 1934 Securities Act; an 8-K is filed by a
registered company within ten days of a significant or material event affecting the company (e.g., a dividend being suspended).
“Fair-Disclosure Rule” (Regulation FD) - Federal securities regulation that requires
publicly traded companies to distribute information to the market as a whole and not to

selected investment firms, analysts, or investors; a means of distributing to the market in a fair and open fashion the financial reports and pending and evolving issues of publicly traded company.