Select the first letter of the word from the list to move
to the appropriate section of the glossary.
A B C D E F G H I
J K L M N O P Q R S T U V W X
Y Z
A securities law term set out by the Securities and Exchange Commission
that exempts certain corporations and wealthy individuals from securities
regulation. Generally, it includes banks, SBICs, stockbrokers, insurance
companies, ERISA plans, or corporations with more than $5 Million in
total assets. It also includes individuals with a net worth in excess
of
$1 Million or individual income in excess of $200,000 for the past
two years.
A selected method of accounting often used by larger corporations. Income
and expenses are booked when “accrued”, whether or not
they have actually been paid or received. This method designates expenses
as incurred and income as earned for the accounting period when due
or receivable.
Actions that are required at meetings can usually be done without meeting
if signed off by all the persons entitled to attend the meeting. Sole
owner companies and routine matters are often handled this way. Most
states require that the consent to the action without meeting be unanimous,
signed by all persons entitled to attend, and filed in the company’s
business records.
A person, firm, or other corporation that is related to the corporation
by common ownership or common methods of control. In most cases, affiliates
have the same duties and obligations as the corporation when issuing
securities. Examples of affiliates might be by a subsidiary corporation,
a controlling shareholder, and a group of corporations under common
control).
Persons authorized to act for another. A corporation acts through its
officers, directors and employees, all of whom are “agents” of
the corporation. Generally, an authorized agent can bind the corporation
to contracts and commitments. In some cases, even “apparent authority” is
enough to bind the corporation. For example, a Vice President’s
signature on an Employment Contract would probably bind the corporation
evenif its policy was that only the President could sign such documents.
Corporations are usually required to have at least one meeting of the
corporation owners each year. The shareholders may vote on matters
affecting the corporation. Usually, the meeting is held to elect directors,
ratify the company’s acts during the prior year, and vote on
matters of corporate policy.
This is the official document that is filed with the appropriate state
regulatory authority to commence the life of the corporation. When
filed, the existence of the corporation is presumptively begun, subject
to the completion of other requirements. The articles, when effective
by the state, become the corporate “charter” and these
terms are often used interchangeably.
This is the official document that is filed with the appropriate state
regulatory authority to commence the life of the limited liability
company. When filed, the existence of the LLC is presumptively begun,
subject to the completion of other requirements. The articles of organization
is the limited liability company equivalent of the Articles of Incorporation
for a corporation.
Assets is an accounting term used to identify things of value held by
the corporation. Assets can be tangible such as cars or machinery,
or intangible, such as patents, licenses, rights. Assets include anything
that can be reduced to a monetary value.
Also called “fictitious name”, it is a name (other than the
corporate name) in which the company sometimes conducts business. In
most states, an assumed name or fictitious name requires the filing of
a certificate that is separate from the incorporation filings. Also,
some states require that the certificate be filed in each county where
the company does business. Since it is difficult to determine in advance
all of the states in which the corporation might someday do business,
we suggest caution in using assumed names.
The total maximum amount of securities (normally in the form of shares
or units) which are reserved for future issuance in the Articles. Most
corporations authorize far more shares than are actually issued, reserving
the balance for future use.
The total amount of capital authorized in the Articles. Usually, this
is the number of shares multiplied by the “par value” of
the shares. The concept is no longer important for the operations of
the entity, but is used by some states to levy additional taxes and
fees. Therefore, we suggest starting with a low number to avoid excess
fees. If additional authorized capital is needed, the company can amend
its charter later.
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State securities statutes and regulations that govern the sale of securities
(including shares and units) in the state. Usually there are exemptions
if only a very small number of “offerees” are involved
or if the offering is made to “accredited investors.” Even
so, a notice filing may be required.
An accounting term that measures the value of the company’s ownership
shares or units based on the net assets the company is carrying on its
accounting records.
A third party company like
Your Incorporation.com, Inc. that provides online incorporation
services or other business incorporation services.
An important rule of law followed by most states. It protects
the company’s
agents from liability for the day to day decisions regarding the operations.
Essentially, the agents of the corporation are protected from liability
if their decisions were reasonably informed, even if those decisions
turn out badly. The rule does not apply when conflicts of interest,
self dealing, or elements of fraud are involved.
The set of rules that the company adopts to establish internal guidelines
and governance. Bylaws typically control the rules regarding election
of directors and officers, notice and timing requirements of meetings,
quorums, and so on.
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A tax term, taken from chapter “C” of the Internal Revenue
Code. All corporations are automatically C corporations unless they file
a timely election to be treated as an S corporation for tax purposes.
C corporations must file and pay federal income tax and do not “pass
through” taxable gains and losses. Since taxes on gains must be
paid at the corporate level and dividend issued to shareholders are also
taxed, the C corporation is potentially subject to “double taxation.”
Usually, units of ownership that have been re-acquired by the company
and cancelled or shares that are cancelled before issuance as part
of a recapitalization or merger. May not be re-issued once cancelled.
A tax determination for assets that generally requires an extended holding
period prior to sale or exchange. Capital assets are normally subject
to more favorable tax treatment.
Gains upon sale of a “capital asset”. The gain is the difference
between the cost or adjusted basis of an asset and the net proceeds from
the sale or exchange of such asset. Capital gains are afforded more favorable
tax treatment than ordinary gains.
A tax determination pertaining to losses that arise form the sale or
exchange of capital assets. The loss is the difference between the
cost or adjusted basis of an asset and the net proceeds from the sale
or exchange of such asset.
The securities that the corporation is permitted to issue. Often used
interchangeably with “authorized shares.”
Short hand term normally used to refer to the company’s “paid
in capital.”
An accounting method that uses the amount actually paid or received in
determining the income or loss of the company.
An official certificate issued by an appropriate state regulatory agency
indicating that the company has the authority to do business in that
state. Normally, this is requested by out of state companies doing
business in other jurisdictions. The process is also sometimes called “domestication.”
Upon the filing of the Articles of Incorporation, the state filing officer
will usually issue a “certificate” showing the acceptance
of the filing. The Certificate of Incorporation may include the date
and time of corporate commencement and an “SOSID number”,
which is used by to track the company at the Secretary of State’s
office.
Normally the Articles become the charter after they have been filed and
accepted by the appropriate state regulatory authority. It also sometimes
refers to the power of the state to “charter” the existence
of the company.
Also called “closely held” this refers to a company with
a very limited number of owners. In some states a separate filing scheme
for close corporations is permitted. Close corporations are exempted
from some of the requirements of larger companies.
The owners of shares of common stock in the company. Common shareholders
are entitled to vote on most corporate matters and select the directors
of the company. They are entitled to pro rata privileges in the assets
and distributions of the company, but are the last priority in bankruptcy
and receivership proceedings.
The common shares are equity shares evidencing ownership in the company.
Documents required by the company under applicable laws and regulations.
Normally, this includes minutes of director and shareholder meetings,
ratification of corporation acts, copies of the articles and any amendments,
a list of company owners, and a record of transactions involving the
sale, purchase or exchange of the company’s securities. Failure
to keep appropriate records is the basis for many claims seeking to “pierce
the corporate veil.”
Dividends that have not been paid. Normally these dividends are limited
to preferred shares or a class of shares that have a guaranteed a dividend.
In many cases, state law prevents the payment of these dividends if
the company would not be solvent after the payments and therefore carry
over from year to year.
A process that permits minority shareholder representation on corporation
boards. The shareholder may “cumulate” all of their votes
for one particular seat, thereby increasing the chances of electing
a director. For example, if there are 10 board seats and the shareholder
only owns 50 shares, he may vote 500 shares for one board seat.
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A corporation that has not completed the process of incorporation, but
is nonetheless held to be a corporation “by fact” as against
the claims of creditors. Permits the liability shield as to officers,
directors and employees from claims against the corporation.
A corporation that has completed all material requirements of incorporation
(and maintenance) so that it is a corporation “by law". Effectively
shields officers, directors and employees from liability for corporation
obligations.
The persons elected by the owners to manage the affairs of the corporation.
A Chair is often elected from among the Directors to conduct the meetings.
Directors have the responsibility of electing the officers, establishing
corporate policy and responsibly managing the significant business
decisions of the Company. Under the Sarbanes –Oxley act, the
directors may have liability for false financial reports and other
corporate wrongdoing.
The voluntary or involuntary termination of a corporation, typically
leading to liquidation. IRS rules mandate liquidation after dissolution
in most cases, although some state law permits corporate “winding
up.”
Payment to owners by the company.
A corporation is domestic to the state where it was incorporated.
The process of an out of state company qualifying to do business in another
state. The company usually obtains certification from its domicile
state that it is current and in good standing. It then files these
documents with an application to do business with the other state’s
regulatory agency.
The state where the corporation is formed or has its principal business
operations or its principal headquarters. While domicile is usually
the state of formation, it is possible for a company to have more than
one state of domicile.
A tax concept that requires the same earnings to be taxed twice, normally
only applicable to C corporations. C corporations are required to file
and pay tax on any income or gains, so the tax is first paid at the
corporate level. Then, if the corporation distributes those gains or
income to its shareholders, the shareholders must report the distribution
as income and pay tax again. Thus, the process is referred to as double
taxation.
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Equals a firm’s net income divided by the number of shares held
by shareholders. For example, a company that has earnings of $200,000
and has 10,000 shares issued and outstanding would have earnings of $20
per share.
See “Federal Tax Identification Number.”
See “Federal Tax Identification Number.”
An accounting term that roughly measures ownership in the company. The
equity is measured by the accounting equation equity = assets – liabilities.
Normally refers to sales of securities with the net proceeds contributed
to the company as paid in capital.
Casualty insurance that protects officers, directors and other named
agents from claims and judgements of lawsuits, arbitration, agency
and regulatory actions and others. This insurance coverage usually
pays for the costs of defense and the costs of expert witnesses, court
fees, depositions and other costs of litigation. E & O insurance
can attract more qualified board members. Coverage does not usually
extend to claims between owners or agents of the company, or if conflicts
of interest, self-dealing or fraud are involved.
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See “Assumed Name.”
An accounting term that determines the beginning and end of the company’s twelve month accounting period. Most small businesses and practically
all S Corporations and LLC’s use a calendar year as the fiscal
year.
A required number issued by the IRS to the business for tax, banking
and identification purposes. Sometimes called the “TIN” or “EIN”,
this number acts for the corporation in much the same way that a social
security number acts for an individual.
A corporation that is domiciled in another state. This simply means that
the corporation was incorporated somewhere else and does not mean that
it is a non-U. S. corporation. Under some circumstances, foreign companies
are required to “domesticate” in other states in order
to do business.
A tax levied by states on companies chartered under or doing business
in the state. The amount can vary depending upon the authorized capital
or earnings within the state.
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Typically, a company that does not engage in business or have operations
but owns securities in other corporations. Usually the holding company
owns all or nearly all of the ownership of the other entities.
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The person or persons who perform the administrative act
of signing the articles to commence a corporation. This is not
to be confused with the “promoters” of the business.
The protection of officers, directors and selected agents of the company.
By indemnification, the company will pay the expenses and costs of
officers, directors or agents and will also pay any judgments or claims
successfully made against them. In many states indemnification is not
permitted for claims arising from conflict of interest, self dealing
or fraud. Indemnification should not be confused with Errors and Omissions
coverage, which is a form of insurance policy. Costs of indemnification
are paid from the corporation’s assets.
Commercial underwriters that offer securities for companies in public
or private offerings.
The portion of the authorized shares that have been issued and are currently
outstanding by a corporation. Does not include redeemed or treasury
shares or shares that have been cancelled.
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The protection of personal assets from the claims of persons or firms
dealing with the company. Without a liability shield, the business
owners (and sometimes others as well) are personally liable for practically
any debt, obligation, or award that would otherwise affect only the
company, including unforeseen costs, litigation, claims and damages.
Without the liability shield, each owner is potentially signing a “blank
check” with unlimited financial exposure.
A relatively new form of business that provides a liability shield to
an unincorporated entity. LLCs are less formal and may elect various
tax treatments by filing a Form 8832. Most LLCs are not required to
file a separate business tax return. LLCs have pass through tax treatment
so the earnings are not subject to double taxation. Their flexibility
has made LLCs an instant favorite for real estate development, trucking
and airplane business, and many sole proprietor service businesses.
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A securities term normally applied to public companies,
referring to the entire worth of the company’s ownership.
If a company has 2 Million shares issued and outstanding and the
stock is currently trading for $10, then the company’s market
capitalization is $20 Million.
A type of LLC management whereby the LLC is managed by someone designated
as the “Manager” rather than by the members. Manager managed LLCs designate this election in the Articles. This is often used when
the owners are more or less passive and the business is being operated
by someone who is not a controlling owner.
An owner of an LLC. In most LLCs, the members have voting rights and
manage the business. They are entitled to distributions. Is somewhat
analogous to common stock shareholders of a corporation.
The units of ownership in a Limited Liability Company. Usually allows
participation in voting and management decisions similar to common
stock in corporations, but may be given different treatment in the
Organizing Agreement. Ownership is often measured in “Units.”
Two or more corporations combining into one pursuant to state statutory
authority. Frequently requires Articles of Merger and may require securities
registration. Larger deals may be subject to federal Hart-Scott-Rodino
requirements as well. Larger deals are subject to federal statutes
as well.
An arbitrary assignment of a par value equal to one-tenth of one penny
or $0.001. Favored in Nevada, Delaware and other jurisdictions that
assess franchise tax on the basis of “authorized capital.” Some
states, such as Texas, arbitrarily mark up mil par or low par stock
to One Dollar par for franchise tax computations.
A written record of various meetings of the company, usually containing “Resolutions” which
adopt some company action. Minutes are usually
taken by the company Secretary or Manager and are placed in the corporation’s
kit or with the other records.
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Persons intending to incorporate later may reserve the chosen name by
an appropriate filing with the state regulatory authority. Names are
reserved for a limited period of time, usually 120 days, and require
filing fees. In many cases the cost of reserving the name is equal
to or more than the cost of incorporating.
The value of the company, expressed by the accounting equation Net Worth
= Assets minus Liabilities.
No par shares are often given arbitrarily high valuations by state regulators
for franchise tax purposes and can inadvertently result in higher taxes
and fees than with a low or “mil” par stock.
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A securities term that broadly encompasses each person, firm or entity
that the corporation solicited to purchase shares or other securities.
The number and type of Offerrees is important in determining whether
exemptions from securities and blue sky law registration requirements
exist.
Persons elected by the board of directors to carry out the day to day
operations of the company. Offices may be designated and titled, such
as Chief Executive Officer (CEO), Chief Operations Officer (COO) President,
Vice-president, Treasurer, and/or Secretary.
Equivalent to bylaws in a corporation, this is an agreement among the
members of an LLC setting forth the terms and conditions of governance.
Since LLC’s are flexible entities, the Operating Agreement can
be crafted to carry out specific purposes of the company, such as methods
of management, tax treatment, and differing treatment of owners.
Startup meeting that confirms and completes the formation of the corporation.
Matters such as election of a slate of officers, issuance of shares,
bank resolutions, adoption of seal, approval of bylaws and other matters
are determined in this meeting. Usually reduced to a set of organizational
minutes with various resolutions and recorded in the corporate kit.
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An accounting term that reflects the money or other assets contributed
to the company. In some states it may refer to the amounts of money
required to be paid in before the company can commence operations.
A somewhat outdated concept that establishes a minimum value that the
corporation must obtain for each share issued. In modern practice, the
par value is totally arbitrary and “no-par” shares are permitted
as well. Par value can be important in establishing the authorized capital
of a company, which is sometimes used to compute the taxes and fees
owed to the state regulatory agencies.
A term applicable to certain tax treatment. In S Corporations and many
LLCs, taxable gains and losses are not paid at the company level but
are passed through to the owners on a pro-rata basis. The owner then
includes his/her share of the gains or losses on the personal tax return.
In this way, there is no danger of “double taxation.”
The possible recognition of income for tax purposes by owners who did
not receive any cash or other distribution. S Corporations and some
LLCs electing to can book income for the year that is not paid out
to owners. For example, an S corporation with two equal owners earns
$50,000 but makes no distribution. Since it is a tax entity,
$25,000 in income is deemed distributed to each of the owners, although
nothing was paid out to them. The owners must then pay tax on their
personal tax returns for their $25,000 portions of the “phantom
income.”
An attempt to remove the corporate and liability shields and impose personal
liability on the business owners and/or operators. Various states handle
this differently, although most require evidence of some attempt to
evade personal obligations, perpetrate a fraud or a crime, or to commit
an injustice. The best defense is careful attention to keeping separate
personal and business activities. Equally important are regular and
careful corporate records, regular meetings, confirmation and ratification
of corporate acts, and keeping corporate activities within the business
purposes of the company.
Rights that give existing owners the ability to maintain their percentage
ownership. Owners with preemptive rights are offered their pro rata
percentage of newly issued shares before those shares can be offered
to anyone else. If an owner with preemptive rights currently owns 10%
of the shares, he/she will be offered up to 10% of the newly issued
shares.
Contracts and obligations undertaken prior to the incorporation of the
business. The general rule is that the business is obligated for such
agreements only to the extent that it has affirmatively “adopted” the
contract. This may occur simply by continuing the agreement and/or
abiding by its terms. In some states, the promoters may be personally
liable for pre-incorporation contracts and the corporation may have
the right to opt out of such contracts.
A class of stock that is given preferential rights to dividends, distributions,
or other stated gains or assets. Preferred stock usually has a “coupon” or
stated amount that is to be paid prior to any payment to the common
voting shareholders. In bankruptcy, receivership or liquidation, the
claims of preferred stockholders are normally paid in full before any
payment to common stockholders.
The ratio derived by dividing the price by the earnings. A $10 stock
that has $2 in annual earnings has a p/e of 5.
Persons involved in the formation of the company. These persons undertake
the various acts necessary to organizing of the business and are normally
entitled to some profits, ownership interest or payment for their services.
Certain professions, such as law, medicine, or engineering, are not permitted
to do business under ordinary commercial corporations or LLCs. In those
circumstances, most states permit professional corporations, professional
associations, professional limited partnerships and/or professional
limited liability companies. The filings are much the same as for regular
companies, but the professionals must be certified in good standing
by the applicable licensing board. Normally claims for malpractice
or negligence are not shielded by the liability shield, although everyday
claims would be.
A written authorization permitting someone to vote another owner’s
shares. It is also sometimes used to identify the person who is casting
the votes on behalf of other owners.
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The minimum number of persons required in order for the company to take
official action. The number is normally stated in the bylaws or Operating
Agreement and is subject to state law. Quorum requirements are designed
to prevent a minority from taking action without affording representation
to the remaining participants. Quorums are usually established by number
of shares and not by persons in actual attendance. In most states,
quorums, once achieved, validate actions taken throughout the meeting
even if people leave later on.
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Redemption or redeemed shares are ownership interests that have been
purchased by the company itself and returned to its treasury. Unless
cancelled, these shares may be re-issued under some circumstances.
Person in the state of domicile authorized to accept official and important
papers on behalf of the Company. The registered agent must be named
in the articles of incorporation and can be changed by company action
from time to time. The registered agent need not be an officer, director
or owner of the company in most states.
The registered office is the place designated for the receipt of official
and important papers on behalf of the Company. The registered office
is listed in the articles and must be located at a physical address
in the state of domicile. Mail boxes and drop boxes are not allowed.
The registered office may, but does not have to be, the place where
the company does business.
Formal action taken by the company, usually at a meeting either of the
directors or the shareholders. In some cases, resolutions may be taken
at emergency meetings or under emergency situations for later ratification.
Resolutions are normally reduced to writing in the form of “Minutes” and
kept in the corporate kit.
An accounting term. Earnings are the amounts of income derived by subtracting
the company’s costs and expenses from its revenues. Some or all
of that amount may be paid to owners in dividends. Any amounts that
are not paid out are deemed retained earnings of the company.
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A corporation with full “liability shield” that has elected
pass through tax treatment as an S corporation. An S corporation does
not pay tax at the corporate level, but files a return on Form 1120 S.
Information is then forwarded to each owner as to his/her share of the
taxable gains or losses and must be included on the owner’s personal
tax returns. To elect S Corporation tax treatment the company must meet
the requirements and file an election on Form 2553 within 75 days of
formation or 75 days from the end of any taxable year. Occasionally,
S corporations can cause “phantom income.”
An act of Congress that sought to regulate public companies and the persons
that operate and manage them. This Act imposes a plethora of duties
on officers and directors with respect to the accuracy and adequacy
of financial information, whistle blower requirements, auditor compliance
and other matters.
A broadly defined term that includes many ownership interests such as
stock, units, bonds, notes, debentures, options, warrants and others.
In some states any expectation of profits that is derived from the
efforts of someone else is a security. Ownership in orange groves,
country club memberships, real estate syndication rights and other
intangible ownership interests have been deemed securities.
The federal law that established the Securities and Exchange Commission
and governs the issuance and transfer of securities in the United States.
All securities must be registered under this Act unless an appropriate
exemption from registration exists. Normally, shares issued to a very
small number of people at formation are exempted.
Ownership interest in a company. Normally refers to common voting shares,
but could also refer to shares in other classes or types of stock.
Certificates of ownership that are issued by the company to show title
in the underlying shares or units. Many states now allow “uncertificated” shares.
The certificate provides evidence of ownership of the underlying shares,
much like a car title demonstrates ownership of the car.
A person or firm that owns shares in a company as shown on the company’s
records or evidenced by a stock certificate.
A method of conducting business by an individual without establishing
a separate entity for the business and without any liability shield.
The sole proprietor has unlimited liability for debts, claims, damages,
costs or other obligations of the business.
A number issued by many Secretary of State offices upon acceptance of
the company and for subsequent use. The general idea is to have a number
that distinguishes between “Jones Painting” in Iowa versus “Jones
Painting” in Wyoming.
The unit of ownership in a corporation, normally in the form of common
voting stock. Other classes of stock are also permissible.
See shareholder.
A book where all the owners of shares of stock in a corporation are listed.
See S Corporation.
Advance agreements to purchase specified securities of a company, normally
in the pre-incorporation period. Subscribers undertake to invest in
the company in stated amounts and for stated cost. In many cases the
subscriber also makes other representations to the Company to insure
exemptions from securities laws. Securities are issued upon payment
from the authorized but unissued shares of the company.
An accounting term representing the assets that are not needed to satisfy
liabilities. Sometimes used to identify cash or assets available for
investment, although this is not a correct usage.
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See “Federal Tax Identification Number.”
See “Federal Tax Identification Number.”
Formerly issued and outstanding shares that have been re-acquired by
the company and not cancelled. Usually may be re-issued.
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A somewhat outdated principle that denied corporate benefits, including
the liability shield, if the corporation acted outside its stated business
purposes. Seldom seen today.
Refers to ownership rights or a bundle of rights. Most LLCs issue “Membership
Units” to their owners much like corporate certificates in corporations.
Units can also refer to bundles of securities, such as a Unit consisting
of a share of common stock, a share of preferred stock, and an option
to purchase two more shares of each at a stated price.
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Somewhat outdated concept that held directors liable if the company did
not collect the full par value for shares that were issued. Intended
to eliminate self dealing, most lawsuits were merely arguments over
the appropriate valuation of property contributed in exchange for shares.
With no par, mil par and low par value shares, this is not a modern
day occurrence. Derives its name from cattle trail tactic of taking
cows to water just before weigh in to obtain a higher price.
Actions that are required at meetings can usually be done without meeting
if signed off by all the persons entitled to attend the meeting. Sole
owner companies and routine matters are often handled this way. Most
states require that the consent to the action without meeting be unanimous,
signed by all persons entitled to attend, and filed in the company’s
business records.
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