As a new business owner, understanding the business terms used with business entities is essential. Below is a list of common business terms used when referring to business entities.
Commonly Used Business Terms
Abandoning and Entity: The act of relinquishing all rights, ownership, and responsibilities in an entity and letting others take over, if desires. It generally requires documentation showing the return of stock or interest and resigning from any position that a member or shareholder may have had in the business prior. Once the prior shareholder or member is no longer associated with the business, they are no longer authorized to open mail, respond to law suits, sign taxes or the like on behalf of that entity.
Business License: Business licenses are permits issued by government agencies that allow individuals or companies to conduct business within the government’s geographical jurisdiction. It is the authorization to start a business issued by the local government.
Charging Order: The single remedy that can generally be brought against a Limited Partner of a Family Limited Partnership or Member of a Limited Liability Company. The Charging Order does not generally protect a General Partner.
Disregarded Entity: A disregarded entity is a business entity that is not recognized as a separate entity for tax purposes. For example, the default rule under the federal “check-the-box” treasury regulations, is that a single member LLC (SMLLC) is considered to be a disregarded entity for tax purposes.
Dissolving, Canceling, or Surrendering an Entity: Business entities doing or transacting business in California or registered with the California Secretary of State (SOS) can dissolve, surrender, or cancel when they cease operations in California and need to terminate their legal existence here. Refer to FTB PUB 1038, Guide to Dissolve, Surrender or Cancel a California Business Entity, for more information.
Dividend: A dividend is a sum of money paid regularly (typically quarterly) by a company to its shareholders out of its profits (or reserves).
Doing Business: A taxpayer is doing or transacting business in California if it actively engages in any transaction for the purpose of financial or pecuniary gain or profit in California. For taxable years beginning on or after January 1, 2011, a taxpayer is also doing business in California if any of the following conditions are satisfied:
- A taxpayer is organized or commercially domiciled in California, or
- A taxpayer’s California sales, property, or payroll exceed the amounts or percentages then applicable under paragraphs (2), (3), or (4) respectively, of subdivision (b) of California Revenue and Taxation Code section 23101. (Subdivision (d) provides that these amounts include a taxpayer’s pro rata or distributive share from pass-through entities.)
More information on this term can be found at ftb.ca.gov/forms and FTB PUB 1060, Guide for Corporations Starting Business in California.
Fictitious Business Name (FBN): Also known as “Doing Business As” or DBA, a fictitious business name is a business name that is different from your personal name, the names of your partners, or the officially registered name of your LLC or corporation. Refer to Appendix 1 for a more detailed explanation.
Foreign Business Entity: A Business Entity that was formed outside of the state of California or outside of the United States is a foreign business entity. A foreign business entity can qualify/register to transact business in California by filing the applicable form with the California Secretary of State.
Informational Return: An informational return is a tax document or statement that contains information required to be reported to federal and state tax authorities. For example, Federal Forms 1098, and 1099 and California Partnership Return 565 are informational returns.
Pass-through Entity: Pass-through entities are not subject to income tax. Rather, the owners are directly taxed individually on the income, taking into account their share of the profits and losses. Examples include: entities classified as partnerships and entities taxable as S corporations. (However, California also imposes a modified corporate franchise/income tax on S corporations.)
Stock: Stock is a share of a company held by an individual or group. Corporations raise capital by issuing stock and entitle the stock owners (shareholders) to partial ownership of the corporation.
The process of understanding business terms and setting up a new business may seem daunting… but, it doesn’t have to be.