FAQs

What does “capitalization” mean?

Capitalization can mean a couple of things. At first it usually refers to the contributions of money or property that the owners (shareholders or members) have contributed to the business, their “capital contributions”. Later on, or as a result, or in anticipation of such contributions, it may refer to a capitalization chart or table, which will set out each owner and their percentage interest in the entity.

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What are stockholders and shareholders?

Simply put, those are the owners, and they can be in many shapes and sizes. A shareholder can be an individual who owns shares in GM or Microsoft; it can be you, owning 100% of the issued shares in your own corporation. It can be another corporation or venture capital firm owning shares in your start-up. "Stockholder" and "shareholder" typically means the same thing.

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What are “issued shares”?

Good question. This concept often gets confused with “authorized shares”. Issued shares are those shares that the corporation has actually “issued”, i.e., transferred to a shareholder. This can be in the form of a certificate, and that can be typical in a small business. In larger businesses, the ownership of issued shares is usually a journal entry in the corporation’s books and records, or with the broker. The number of issues shares cannot exceed the number of authorized shares.

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What are directors?

Directors are the individuals who make up the board of directors. Due to the responsibility these individuals have, it’s common for the business to obtain insurance to cover the directors (aka D&O insurance) for the decisions they make, even though the fact of the corporation is supposed to shield – sometimes things don’t go the way you expect . . . pesky lawyers!!

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What is a dividend?

Hopefully something that you have plenty of! A dividend is the cash (or property) that is transferred from the corporation to its shareholders after all expenses are paid, including the corporation’s taxes. Only C Corporations pay “dividends”; S Corporations make “distributions”, since S Corporations themselves do not generally pay taxes. A dividend is not a deductible expense of the corporation.

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What does a CEO do?

A CEO is the Chief Executive Officer. This is the person responsible for over-seeing all of the day-to-day activities of the corporation. Sometimes LLCs have CEOs. The CEO is the face of the company, and so larger businesses tend to hire a CEO that has appeal to the public to encourage investment in the business, or to attract new customers. The CEO, when it comes to extraordinary decisions, seeks and takes direction from the board of directors. The CEO can be, but need not be, a shareholder.

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What does a CFO do?

The Chief Financial Officer, also sometimes known as the treasurer, handles the financial aspects of the corporation or LLC. In larger businesses, the CFO becomes an advisor to the CEO, conferring on best approaches for increasing business or investment. In a very small business, the CEO and CFO are frequently the same person, and there’s nothing wrong with that.

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What does a corporate secretary do?

Corporate secretaries are the unsung heroes in the officer world. They are responsible for the grunt work of the corporation or LLC, making sure i’s are dotted, t’s crossed, taking corporate minutes, and frequently interacting with the business’s lawyer to make sure paperwork and corporate housekeeping are all in order. In a very small business, the corporate secretary is frequently the same person as the CFO and the CEO. In larger businesses, you’ll want to try to make the CEO and corporate secretary two different people, since there may be occasion when refinancing or issuing shares to a corporate investor will require that the secretary attest to the identity of the CEO, which gets awkward when it’s the same person. The position of Secretary is required under California law.

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What does a COO do?

The position of Chief Operating Officer is not required under state law, but businesses that are growing, or intend to grow, will almost always have one. The COO is responsible for the day-to-day of the business, and usually reports to the CEO. And so I know I said that that’s the CEO’s job; in larger businesses, those responsibilities are handed over to the COO, so that the CEO has more time to develop new strategies to grow the business.

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What is an “annual meeting”?

Corporations under most state laws, including California, require that the shareholders and the board of directors of a corporation hold an annual meeting. Some LLC statutes require it as well, though not in California. Those meetings are opportunities to vote on annual issues, like elections of officers and review of last year’s financials. In very small businesses, these meetings may be memorialized by consents . . . you don’t have to hold an actual meeting with yourself (unless that’s your thing and you’re looking for a “legit” reason to deduct a trip to Hawaii for a shareholder’s meeting – that won’t really work, by the way).

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