Business FAQ

What legal forms apply to businesses?

Running a business can be a difficult and complicated enterprise, particularly if you are not on top of all the proper legal filings, contracts, and forms that must be properly executed to retain your legal status. In fact, when it comes to legal forms, the category of “business” is one of the most highly-varied. That’s why a high number of legal forms are routinely used on a regular basis in the business world – these forms range from joint venture agreements and business plans to royalty agreements and work orders.

Determining which legal forms best apply to your business comes from a combination of both experience and knowledge. However, many of the answers below deal with specific legal forms that may apply to your specific business situation.

What do I need to include in a business plan?

Business plans require a detailed analysis of the field your business will be competing in, as well as the statistics of your own projections and specific financial plans to execute the business once formed. However, there may be a wide variety of details that you yourself have not thought of which is why business plan forms and questionnaires can be particularly useful in your situation.

Additionally, you’ll likely want to create a financing plan and marketing plan in conjunction with your business plan.

What do I need to hire new employees?

An Employment Agreement Contract is the standard form applying to your situation, though you’ll want to be aware of alternatives. For example, if you are hiring an individual on a per-project basis, you may want to have them sign an Independent Contractor Agreement rather than an Employment Agreement. Agreements with other businesses include Management and Manufacturing Agreements, as well as Joint Venture Agreements. You may also want to look into Non-Disclosure Agreements to protect any trade secrets that your employees learn as a result of working for you.

My business is actually a franchise. What do I need to know?

An agreement between a Franchiser and a Franchisee (you, in this case) should be carefully reviewed before you finalize any deal. You’ll want to review the Franchise Agreement and know what you’re getting into by reviewing provisions such as the Business Location, Grant of License, Term and Termination and Franchisee’s Representatives and Warranties. Be sure to use a Franchisee checklist in order to make sure that you’ve done all your due diligence.

What kinds of forms help me manage my business’ finances?

Using the right forms for your finances means applying the correct forms to the right transactions. For some assistance with that, you can review some of the most important financial forms right here:

• Invoices: An itemized statement of all products/services rendered along with a bill for payment typically sent to a client. These are usually presented by service-based businesses along with a description of the services that have already been rendered.
• Credit Memo: Issuing credit to a customer or client will require that a credit memo be used; you’ll want to make sure to keep a copy for your own records, as well as verification of when the credit memo was sent.
• Notices: Ranging from Notices of Dishonored Checks to Notices of Past Due Payment, there might be a wide range of reasons your business might need to use a notice – but it’s important to find the notice best tailored to your situation.
• Payroll: Various Payroll forms need to be used to keep an accurate record of everything that is being paid to your employees. Time Sheets and Annual Payroll Summaries are often included in Payroll form kits.

There is more to running a business, of course, but these basic finance forms should help you understand what kind of forms you or an employee might be expected to use on a regular basis.

What types of businesses are there?

When you register as a business in your state, you’re generally registering as a specific type.

Here’s a brief rundown on the most popular types of businesses:

• Sole proprietorship: This is a largely informal way of handling business, and will require that you don’t actually have any employees – it is, after all, a sole proprietorship. This can be a very flexible type of business in terms of taxes, but when your business needs a new employee structure you’ll have to change.
• Limited Liability Company: This is often the type of company that certain firms (such as legal firms) opt for. Its objective is in its title, reducing the liability of the person who owns the LLC from anything that the LLC is directly involved in. For this reason, many real estate ownership companies are also LLC’s.
• S-Corporation: Mainly created for a specific type of tax structure, the S-Corporation comes in handy when its owners want to avoid double taxation that comes from paying both a corporate tax and an income tax.
• C-Corporation: Also known as a traditional corporation, this type of corporation is separate and distinct from its shareholders, which often means reduced liability but a potentially increased tax burden.

I’m a general contractor. What kind of forms do I need?

Using a General Contractor Kit will often land you such legal forms as General Contractor Amendment Agreements, Invoice and Change Order Forms – though there are many more forms you may want to ensure are part of the kit. You’ll also likely need to get used to signing Nondisclosure Agreements with your clients to prevent the sharing of trade secrets you learn in your general contractor endeavors.

How do I know my business forms are valid?

You’ll need to make sure that your business forms comply with the laws of your local state. Some forms apply at the federal level, so there will be less concern there. However, you’ll be able to have a good idea about the validity of your forms in their thoroughness, their language and the provisions they contain. The best you can do is to educate yourself about these forms and know what’s required of you and your business.

Account: A separate record of an asset, liability, income, or expense of a business.

Accounting: The process for recording, summarizing, and interpreting business financial records.

Accounting method: The method of recording income and expenses for a business; can be either accrual method or cash method.

Accounting period: A specific time period covered by the financial statements of a business.

Accounting system: The specific system of record-keeping used to set up the accounting records of a business. See also single-entry accounting or double-entry accounting.

Accounts payable: Money owed by a business to another for goods or services purchased on credit. Money that the business intends to pay to another.

Accounts receivable: Money owed to the business by another for goods or services sold on credit. Money that the business expects to receive.

Accrual method: Accounting method in which all income and expenses are counted when earned or incurred regardless of when the actual cash is received or paid.

Accrued expenses: Expenses that have been incurred but have not yet been paid.

Accrued income: Income that has been earned but has not yet been received.

ACRS: Accelerated Cost Recovery System. Generally, a method of depreciation used for assets purchased between 1980 and 1987.

Aging: The method used to determine how long accounts receivable have been owed to a business.

Authorized stock: The number of shares of stock that a corporation is allowed to issue as stated in the Articles of Incorporation. All authorized shares need not be issued.

Balance sheet: The business financial statement that depicts the financial status of the business on a specific date by summarizing the assets and liabilities of the business.

Balance sheet accounts: Asset and liability accounts used to prepare business balance sheets.

Balance sheet equation: Assets = Liabilities + Equity, or Equity = Assets – Liabilities.

Board of directors: The group with control of the general supervision of the corporation. They are elected by the shareholders and the directors, in turn, appoint the officers of the corporation.

Bookkeeping: The actual process of recording the figures in accounting records. Business corporation laws: For each individual state, these provide the legal frame- work for the operation of corporations. The Articles of Incorporation and the Bylaws of a corporation must adhere to the specifics of state law.

Business liabilities: Business debts. Also the value of the owner’s equity in his or her business.

Bylaws: The internal rules that govern the management of the corporation. They contain the procedures for holding meetings, appointments, elections and other management matters. If these conflict with the Articles of Incorporation, the provision in the Articles will be controlling.

C-corporation: A business entity owned by shareholders that is not an S-corporation. Subject to double taxation, unlike S-corporations.

Calendar year: Year consisting of 12 consecutive months ending on December 31st.

Capital: Initially, the actual money or property that shareholders transfer to the corporation to allow it to operate. Once in operation, capital also consists of accumulated profits. The net worth of the corporation, the owner’s equity in a business, and/or the ownership value of the business.

Capital expense: An expense for the purchase of a fixed asset; an asset with a useful life of over one year. Generally, must be depreciated rather than deducted as a business expense.

Capital stock: See authorized stock.

Capital surplus: Corporation owner’s equity. See also retained capital.

Cash: All currency, coins, and checks that a business has on hand or in a bank account.

Cash method: Accounting method in which income and expenses are not counted until the actual cash is received or paid.

Cash out: Cash paid out for business purposes, such as a refund.

Chart of Accounts: A listing of the types and numbers of the various accounts that a business uses for its accounting records.

Check register: A running record of checks written, deposits made, and other transactions for a bank account.

Cost basis: Total cost to a business of a fixed asset.

Cost of goods sold: The amount that a business has paid for the inventory that it has sold during a specific period. Calculated by adding beginning inventory and additions to inventory and then deducting the ending inventory value.

Credit: In double-entry accounting, an increase in liability or income accounts or a decrease in asset or expense accounts.

Current assets: Cash and any other assets that can be converted to cash or consumed by the business within one year.

Current debt: Debt that will normally be paid within one year.

Current liabilities: Debts of a business that must be paid within one year.

Current ratio: A method of determining the liquidity of a business. Calculated by dividing current assets by current liabilities.

Debit: In double-entry accounting, a decrease in liability or income accounts or an increase in asset or expense accounts.

Debt ratio: A method of determining the indebtedness of a business. Calculated by dividing total liabilities by total assets.

Depreciation: Cost of fixed asset deductible proportionately over time.

Dissolution: Methods by which a corporation concludes its business and liquidates. Dissolutions may be involuntary because of bankruptcy or credit problems or voluntary on the initiation of the directors or shareholders of a corporation.

Dividend: A distribution of money or property paid by the corporation to a share- holder based on the amount of shares held. A proportionate share of the net profits of a business that the board of directors has determined should be paid out to shareholders, rather than held as retained earnings. Dividends must be paid out of the corporation’s net earnings and profits. The board of directors has the authority to declare or withhold dividends based on sound business discretion.

Domestic corporation: A corporation is a domestic corporation in the state in which it is incorporated. See also foreign corporation.

Double-entry accounting: An accounting system under which each transaction is recorded twice: as a credit and as a debit. A very difficult system of accounting to learn and understand.

Equity: Any debt that a business owes. It is owner’s equity if owed to the business owners and liabilities if owed to others.

Expenses: The costs to a business of producing its income. Any money that it has paid or will pay out during a certain period.

FEIN: Federal Identification Number, used for tax purposes.

FICA: Federal Insurance Contributions Act. Taxes withheld from employees and paid by employers for Social Security and Medicare.

Fictitious name: See assumed name.

FIFO: First-in, first-out method of accounting for inventory. The inventory value is based on the cost of the latest items purchased.

Financial statements: Reports that summarize the finances of a business; generally a profit and loss statement and a balance sheet.

Fiscal year: A 12-month accounting period used by a business.

Fiscal-year reporting: For income tax purposes, reporting business taxes for any 12-month period that does not end on December 31 of each year.

Fixed assets: Assets of a business that will not be sold or consumed within one year. Generally, fixed assets (other than land) must be depreciated.

Foreign corporation: A corporation is referred to as a foreign corporation in all states other than the one in which it is actually incorporated. In order to conduct active business affairs in a different state, a foreign corporation must be registered with the other state for the authority to transact business and it must pay an annual fee for this privilege.

FUTA: Federal Unemployment Tax Act. Federal business unemployment taxes.

General journal: In double-entry accounting, used to record all of the transactions of a business in chronological order. Transactions are then posted (or transferred) to the appropriate accounts in the general ledger.

General ledger: In double-entry accounting, the central listing of all accounts of a business.

Gross pay: The total amount of an employee’s compensation before the deduction of any taxes or benefits.

Gross profit: Gross sales minus the cost of goods sold.

Gross sales: The total amount received for goods and services during an accounting period.

Gross wages: The total amount of an employee’s compensation before the deduction of any taxes or benefits.

Income: Any money that a business has received or will receive during a certain period.

Income statement: Financial statement that shows the income and expenses for a business. Also referred to as an “operating statement” or “profit and loss statement.”

Indemnify: To reimburse or compensate. Directors and officers of corporations are often reimbursed or indemnified for all the expenses they may have incurred in incorporating.

Initial capital: The money or property that an owner or owners contribute to starting a business.

Intangible personal property: Generally, property not attached to land that you cannot hold or touch (for example: copyrights, business goodwill, etc.).

Inventory: Goods that are held by a business for sale to customers.

Invoice: A bill for the sale of goods or services that is sent to the buyer.

Issued shares: The number of authorized shares of stock that are actually transferred to shareholders of the corporation. Also referred to as outstanding shares. See also treasury shares.

Ledgers: The accounting books for a business. Generally, refers to the entire set of accounts for a business.

Liabilities: The debts of a business.

LIFO: Last-in, first-out method of valuing inventory. Total value is based on the cost of the earliest items purchased.

Liquidity: The ability of a company to convert its assets to cash and meet its obligations with that cash.

Long-term assets: The assets of a business that will be held for over one year. Those assets of a business that are subject to depreciation (except for land).

Long-term debts: Debts that will not be paid off in one year.

Long-term liabilities: The debts of a business that will not be due for over one year.

Long-term loans payable: Money due on a loan more than one year in the future.

Long-term notes payable: Money due more than one year in the future.

MACRS: Modified accelerated cost recovery system. A method of depreciation for use with assets purchased after January 1, 1987.

Managers: In a limited liability company, those persons selected by the members of the company to handle the management functions of the company. Managers of limited liability companies may or may not be members/owners of the company. Managers are roughly analogous to the officers of a corporation.

Members: In a limited liability company, those persons who have ownership interests (equivalent to shareholders in a corporation). Most states allow single-member limited liability companies.

Minutes: A written record of the activities of a meeting.

Net income: The amount of money that a business has after deducting the cost of goods sold and the cost of all expenses. Also referred to as “net profit.”

Net loss: The amount by which a business has expenses and costs of goods sold greater than income.

Net pay: The amount of compensation that an employee actually will be paid after the deductions for taxes and benefits.

Net profit: The amount by which a business has income greater than expenses and cost of goods sold. Also referred to as “net income.”

Net sales: The value of sales after deducting the cost of goods sold from gross sales.

Net wages: The amount of compensation that an employee will actually be paid after the deductions for taxes and benefits.

Net worth: The value of the owner’s share in a business. The value of a business determined by deducting the debts of a business from the assets of a business. Also referred to as “owner’s equity.”

No-par value: Shares of stock that have no specific face value. The board of directors can assign a value to the shares for sale and can then allocate a portion of the sales price to the paid-in-capital account.

Nontaxable income: Income that is not subject to any state or local sales tax.

Not-for-profit corporation: A corporation formed under state law that exists for a socially worthwhile purpose. Profits are not distributed but retained and used for corporate purposes. May be tax-exempt. Also referred to as “nonprofit.”

Officers: Manage the daily operations of a corporation. Generally consists of a president, vice president, secretary, and treasurer. Appointed by the board of directors.

Operating margin: Net sales divided by gross sales. The actual profit on goods sold, before deductions for expenses.

Operating statement: Financial statement that shows the income and expenses for a business. Also referred to as “income statement” or “profit and loss statement.”

Owner’s equity: The value of an owner’s share in a business. Also referred to as “capital.”

Par value: The face value assigned to shares of stock. Par-value stock must be sold for at least the stated value, but can be sold for more than the par value.

Partnership: An unincorporated business entity that is owed by two or more per- sons.

Payee: Person or business to whom a payment is made.

Payor: Person or business that makes a payment.

Perpetual duration: Existence of a corporation forever.

Personal property: All business property other than land and the buildings that are attached to the land.

Petty cash: Cash that a business has on hand for payment of minor expenses when use of a business check is not convenient. Not to be used for handling sales revenue.

Petty cash fund: A cash fund. Considered part of cash on hand.

Petty cash register: The sheet for recording petty cash transactions.

Physical inventory: The actual process of counting and valuing the inventory on hand at the end of an accounting period.

Piercing the corporate veil: A legal decision that allows a court to ignore the corporate entity and reach the assets of the shareholders, directors, or officers.

Plant assets: Long-term assets of a business. Those business assets that are subject to depreciation (other than land).

Posting: In double-entry accounting, the process of transferring data from journals to ledgers.

Pre-paid expenses: Expenses that are paid for before they are used (for example: insurance, rent, etc.).

Preemptive rights: A shareholder right that allows shareholders the opportunity to maintain their percentage of ownership of the corporation in the event that additional shares are offered for sale.

Profit and loss statement: Financial statement that shows the income and expenses for a business. Also referred to as an “income statement” or “operating statement.”

Proxy: A written shareholder authorization to vote shares on behalf of another. Directors may never vote by proxy (except in some close corporations).

Real property: Land and any buildings or improvements that are attached to the land.

Reconciliation: The process of bringing a bank statement into agreement with the business check register.

Recovery period: Specific time period for dividing up the cost into proportionate amounts.

Resolution: A formal decision that has been adopted by either the shareholders or the board of directors of a corporation.

Retail price: The price for which a product is sold to the public.

Retained capital: Corporation owner’s equity. See also capital surplus.

Retained earnings: In a corporation, the portion of the annual profits of a business that are kept and reinvested in the business, rather than paid to shareholders in the form of dividends.

Revenue: Income that a business brings in from the sale of goods or services or from investments.

Salary: Fixed weekly, monthly, or annual compensation for an employee.

Sales: Money brought into a business from the sale of goods or services.

Sales income: Revenue derived from selling a product of some type.

Salvage value: The value of an asset after it has been fully depreciated.

Service income: Income derived from performing a service for someone.

Service of process: To accept subpoenas or summonses for a corporation.

Shareholder’s equity: In a corporation, the owner’s equity of a business divided by the number of outstanding shares.

Short-term loans payable: Money due on a loan within one year.

Short-term notes payable: Money due within one year.

Single-entry accounting: A business recordkeeping system that generally tracks only income and expense accounts. Used generally by small businesses, it is much easier to use and understand than double-entry accounting.

Straight-line depreciation: Spreads the deductible amount equally over the recovery period.

Supplies: Materials used in conducting the day-to-day affairs of a business (as opposed to raw materials used in manufacturing).

Tangible personal property: Property not attached to land that you can hold and touch (for example: machinery, furniture, equipment).

Taxespayable: Total of all taxes due but not yet paid.

Treasury shares: Shares of stock that were issued, but later reacquired by the corporation and not canceled. May be issued as dividends to shareholders. They are issued, but not outstanding for terms of voting and quorums.

Trial balance: In double-entry accounting, a listing of all the balances in the general ledger in order to show that debits and credits balance.

Wages: Hourly compensation paid to employees, as opposed to salary.

Wages payable: Total of all wages and salaries due to employees but not yet paid out.

Wholesale price: The cost to a business of goods purchased for later sale to the public.

Working capital: The money available for immediate business operations. Current assets minus current liabilities.

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