Corporate Law Glossary
A comprehensive reference of corporate law terms and definitions. Bookmark this page for quick access whenever you encounter unfamiliar legal terminology.
63 terms
Accredited Investor
An individual or entity that meets certain income or net worth thresholds set by the SEC, qualifying them to participate in private securities offerings not registered with the SEC. For individuals, this generally means an annual income exceeding $200,000 (or $300,000 jointly with a spouse) or a net worth exceeding $1 million excluding primary residence.
Articles of Incorporation
The formal document filed with the state to legally create a corporation. In Illinois, this document is filed with the Secretary of State and includes the corporation's name, registered agent, number of authorized shares, and purpose. Also known as a Certificate of Incorporation in some states.
Articles of Organization
The formal document filed with the state to legally create a Limited Liability Company (LLC). In Illinois, this is filed with the Secretary of State and includes the LLC's name, registered agent, management structure, and purpose.
Asset Purchase Agreement
A contract in which a buyer purchases specific assets (and assumes specific liabilities) of a business, rather than purchasing the entity's ownership interests. This structure allows the buyer to select which assets and liabilities to acquire and typically provides greater protection against unknown liabilities.
Board of Directors
The governing body of a corporation elected by shareholders to oversee the company's management, set strategic direction, and protect shareholder interests. Directors owe fiduciary duties of care and loyalty to the corporation and its shareholders.
Breach of Contract
A violation of a contractual obligation when a party fails to perform any term of the contract without a legitimate legal excuse. Remedies may include monetary damages, specific performance, or contract rescission. In Illinois, the statute of limitations for written contracts is 10 years.
Business Judgment Rule
A legal principle that protects corporate directors and officers from liability for business decisions made in good faith, with reasonable care, and in the honest belief that the action was in the company's best interest. The rule creates a presumption that directors acted properly unless shown otherwise.
Bylaws
The internal rules governing a corporation's operations, including procedures for board meetings, officer appointments, shareholder voting, and record-keeping. Unlike articles of incorporation, bylaws are not filed with the state and can typically be amended by the board of directors.
C-Corporation
A business entity taxed separately from its owners under Subchapter C of the Internal Revenue Code. C-Corps face double taxation — the corporation pays taxes on its income, and shareholders pay taxes on dividends received. However, C-Corps offer advantages for raising capital and have no restrictions on the number or type of shareholders.
Cap Table
Short for capitalization table — a spreadsheet or document that shows the ownership structure of a company, including all equity holders, their percentage ownership, equity dilution, and the value of equity in each round of investment. Essential for fundraising and M&A transactions.
Commercial Lease
A legally binding contract between a landlord and a business tenant for the rental of commercial property. Unlike residential leases, commercial leases in Illinois are largely unregulated, meaning terms are fully negotiable. Common types include gross leases, net leases, and triple-net (NNN) leases.
Confidentiality Agreement
See Non-Disclosure Agreement (NDA). A legal contract in which one or both parties agree not to disclose confidential information shared during a business relationship. Common in M&A due diligence, employment relationships, and business partnerships.
Corporate Governance
The system of rules, practices, and processes by which a company is directed and controlled. It involves balancing the interests of stakeholders including shareholders, management, customers, suppliers, and the community. Good governance includes transparent reporting, ethical leadership, and accountability.
Corporate Veil
The legal separation between a corporation (or LLC) and its owners that protects personal assets from business liabilities. 'Piercing the corporate veil' occurs when a court disregards this separation, typically due to commingling of funds, failure to observe corporate formalities, or undercapitalization.
Damages
Monetary compensation awarded by a court to a party who has suffered loss or injury due to another party's breach of contract or other wrongful act. Types include compensatory damages (actual losses), consequential damages (indirect losses), punitive damages (punishment), and liquidated damages (pre-agreed amounts).
Dilution
The reduction in existing shareholders' ownership percentage that occurs when a company issues new shares. Dilution commonly occurs during fundraising rounds, employee stock option exercises, or convertible note conversions. Anti-dilution provisions in investment agreements can protect investors from excessive dilution.
Double Taxation
The taxation of corporate income at both the entity level and the shareholder level. C-Corporations pay corporate income tax on their profits, and shareholders are taxed again when they receive dividends. This is one of the primary reasons many small businesses choose pass-through entity structures like S-Corps or LLCs.
Due Diligence
A comprehensive investigation and analysis of a business conducted by a prospective buyer, investor, or lender before a transaction. Due diligence typically covers financial statements, legal compliance, contracts, intellectual property, employment matters, real estate, and technology systems.
Earn-Out
A provision in an M&A agreement where a portion of the purchase price is contingent on the acquired business achieving specified financial targets after closing. Earn-outs bridge valuation gaps between buyer and seller expectations but can create post-closing disputes over measurement and management.
EBITDA
Earnings Before Interest, Taxes, Depreciation, and Amortization — a widely used measure of a company's operating profitability. EBITDA is commonly used as the basis for business valuations (via EBITDA multiples) and is a key metric in M&A transactions and lending decisions.
Employer Identification Number (EIN)
A nine-digit number assigned by the IRS to business entities for tax identification purposes. An EIN is required for hiring employees, opening business bank accounts, and filing business tax returns. Application is free and can be completed online through the IRS website.
Equity
Ownership interest in a company, typically represented by shares of stock in a corporation or membership interests in an LLC. Equity holders are entitled to a share of the company's profits and assets and may have voting rights on certain corporate matters.
Escrow
An arrangement in which a neutral third party holds funds, documents, or other assets on behalf of transacting parties until specified conditions are met. In M&A transactions, a portion of the purchase price is often held in escrow to secure the seller's indemnification obligations.
Fiduciary Duty
A legal obligation to act in the best interest of another party. Corporate directors and officers owe fiduciary duties to the corporation and its shareholders, including the duty of care (making informed decisions) and the duty of loyalty (avoiding self-dealing and conflicts of interest).
Force Majeure
A contractual provision that excuses one or both parties from performance obligations when extraordinary events beyond their control — such as natural disasters, pandemics, wars, or government actions — make performance impossible or impracticable. The scope and application of force majeure clauses received significant attention during the COVID-19 pandemic.
Franchise Agreement
A legal contract between a franchisor and franchisee that grants the franchisee the right to operate a business using the franchisor's brand, systems, and intellectual property. Franchise agreements are heavily regulated at both the federal level (FTC Franchise Rule) and in Illinois (Illinois Franchise Disclosure Act).
General Counsel
The chief legal officer of a company responsible for overseeing all legal matters. For companies without an in-house legal team, outside general counsel provides the same function on a part-time or retainer basis, serving as the company's primary legal advisor for day-to-day matters.
Good Standing
The status of a business entity that has met all statutory requirements including filing annual reports and paying applicable fees. A Certificate of Good Standing from the Secretary of State confirms that the entity is authorized to transact business. Good standing is often required for loans, contracts, and real estate transactions.
Holdback
A portion of the purchase price in an M&A transaction that is retained by the buyer or placed in escrow for a specified period after closing, typically to secure the seller's indemnification obligations for breaches of representations and warranties. Holdback amounts commonly range from 5% to 15% of the total purchase price.
Indemnification
A contractual obligation in which one party agrees to compensate another party for specified losses, damages, or liabilities. In M&A agreements, the seller typically indemnifies the buyer for breaches of representations and warranties. In commercial contracts, indemnification provisions allocate risk between the parties.
Intellectual Property (IP)
Creations of the mind that are legally protected, including patents (inventions), trademarks (brand identifiers), copyrights (original works of authorship), and trade secrets (confidential business information). IP protection is critical for maintaining competitive advantage and is a key component of business valuation.
Letter of Intent (LOI)
A preliminary document outlining the key terms of a proposed M&A transaction before the parties invest in detailed due diligence and definitive documentation. Most LOI terms are non-binding, with the exception of exclusivity, confidentiality, and expense allocation provisions, which are typically binding.
Liability Shield
The protection that a properly formed and maintained business entity (corporation or LLC) provides to its owners, shielding their personal assets from the business's debts, obligations, and liabilities. This protection can be lost through piercing the corporate veil if the entity is not properly maintained.
Limited Liability Company (LLC)
A business entity that combines the liability protection of a corporation with the tax flexibility and operational simplicity of a partnership. LLCs are governed by an operating agreement and can be taxed as a sole proprietorship, partnership, S-Corp, or C-Corp depending on the members' election.
Material Adverse Change (MAC)
A significant negative change in the financial condition, operations, or prospects of a target company between the signing and closing of an M&A transaction. MAC clauses allow a buyer to walk away from or renegotiate a deal if a qualifying material adverse change occurs before closing.
Membership Interest
An owner's share of an LLC, analogous to shares of stock in a corporation. Membership interests represent both economic rights (share of profits and distributions) and governance rights (voting on company matters). The terms of membership interests are defined in the operating agreement.
Mergers & Acquisitions (M&A)
The broad category of transactions involving the consolidation of companies or assets. A merger combines two entities into one, while an acquisition involves one entity purchasing another. M&A transactions encompass stock purchases, asset purchases, mergers, joint ventures, and other forms of business combinations.
Non-Compete Agreement
A contract restricting an individual from competing with a business for a specified period of time within a defined geographic area after leaving employment or selling a business. Illinois's Freedom to Work Act prohibits non-competes for employees earning less than $75,000 annually and imposes additional requirements for enforceability.
Non-Disclosure Agreement (NDA)
A legal contract in which one or both parties agree to keep specified information confidential. NDAs are commonly used in business negotiations, M&A due diligence, employment relationships, and when sharing proprietary information with potential partners or vendors. NDAs can be mutual (both parties bound) or one-way.
Non-Solicitation Agreement
A contract restricting an individual from soliciting a company's clients, customers, or employees for a specified period after leaving employment. Less restrictive than non-competes, non-solicitation agreements are more likely to be enforced by courts. In Illinois, they are prohibited for employees earning less than $45,000 annually.
Operating Agreement
The foundational governance document for an LLC, similar to bylaws for a corporation. It defines member rights, profit/loss allocations, management structure, voting procedures, capital contributions, transfer restrictions, and dissolution procedures. While not legally required in Illinois, an operating agreement is essential for protecting members' liability shield.
Pass-Through Entity
A business entity (such as an S-Corp, LLC, or partnership) that does not pay income tax at the entity level. Instead, income and losses 'pass through' to the owners' personal tax returns, avoiding the double taxation that applies to C-Corporations. Most small and mid-sized businesses choose pass-through structures.
Patent
A form of intellectual property that grants the inventor exclusive rights to make, use, and sell an invention for a limited period (typically 20 years for utility patents). Patents are granted by the United States Patent and Trademark Office (USPTO) and require the invention to be novel, non-obvious, and useful.
Private Placement
The sale of securities to a limited number of qualified investors without a public offering or SEC registration. Private placements are commonly conducted under Regulation D exemptions and are the primary method by which startups and private companies raise capital from investors.
Purchase Agreement
The definitive legal document in an M&A transaction that contains the complete terms of the acquisition, including purchase price, representations and warranties, indemnification provisions, closing conditions, and post-closing obligations. Also called a Definitive Agreement or Acquisition Agreement.
Registered Agent
A person or entity designated to receive legal documents, government notices, and service of process on behalf of a business entity. Illinois law requires every LLC and corporation to maintain a registered agent with a physical address in Illinois. The registered agent must be available during normal business hours.
Regulation D
A set of SEC rules providing exemptions from registration requirements for private securities offerings. The most commonly used exemptions are Rule 504 (offerings up to $10 million), Rule 506(b) (unlimited amount, up to 35 non-accredited investors), and Rule 506(c) (unlimited amount, accredited investors only, general solicitation permitted).
Representations and Warranties
Statements of fact made by parties in a transaction agreement, particularly in M&A deals. Representations are statements about past or present facts; warranties are assurances that certain conditions are true. Breaches of representations and warranties typically trigger indemnification obligations.
Restrictive Covenant
A contractual provision that restricts one party's future activities, commonly found in employment agreements and M&A transactions. Common types include non-compete, non-solicitation, non-disclosure, and non-disparagement agreements. Enforceability varies by jurisdiction and depends on the reasonableness of the restrictions.
S-Corporation
A corporation that has elected pass-through tax treatment under Subchapter S of the Internal Revenue Code. S-Corps avoid double taxation by passing income and losses through to shareholders' personal tax returns. S-Corps are limited to 100 shareholders, one class of stock, and U.S. citizen/resident shareholders.
Securities
Financial instruments representing ownership (equity securities), debt (debt securities), or the right to ownership (derivatives). Stocks, bonds, membership interests, and investment contracts are all securities. The issuance and trading of securities are heavily regulated by the SEC and state regulators.
Shareholder Agreement
A contract among the shareholders of a corporation that governs their relationship and protects their respective interests. Common provisions include transfer restrictions (right of first refusal, tag-along and drag-along rights), voting agreements, dividend policies, non-compete obligations, and dispute resolution procedures.
Sole Proprietorship
The simplest form of business entity in which one individual owns and operates the business. Sole proprietorships offer no liability protection — the owner is personally liable for all business debts and obligations. No formal filing is required to create a sole proprietorship, though Chicago businesses may need local permits and licenses.
Specific Performance
An equitable remedy in which a court orders a party to perform their obligations under a contract, rather than simply paying monetary damages. Specific performance is typically available only when monetary damages would be inadequate — for example, in real estate transactions or the sale of unique assets.
Statute of Limitations
The legally prescribed time period within which a legal claim must be filed. In Illinois, the statute of limitations for written contracts is 10 years, for oral contracts it is 5 years, for personal injury it is 2 years, and for property damage it is 5 years. Missing the statute of limitations permanently bars the claim.
Term Sheet
A non-binding document outlining the key financial and governance terms of a proposed investment or transaction. In venture capital, term sheets typically address valuation, investment amount, liquidation preferences, board composition, anti-dilution protection, and voting rights. Term sheets serve as the basis for negotiating definitive agreements.
Trade Secret
Confidential business information that derives economic value from not being generally known and is subject to reasonable efforts to maintain its secrecy. Examples include formulas, algorithms, customer lists, manufacturing processes, and business strategies. Trade secrets are protected under the Illinois Trade Secrets Act and the federal Defend Trade Secrets Act.
Trademark
A word, phrase, symbol, design, or combination thereof that identifies and distinguishes the source of goods or services. Trademarks can be registered at the state level (Illinois Secretary of State) or federal level (USPTO). Federal registration provides nationwide protection and significant legal advantages in enforcement actions.
Triple Net Lease (NNN)
A commercial lease structure in which the tenant pays base rent plus all three categories of property operating expenses: property taxes, insurance, and common area maintenance (CAM). NNN leases shift most property costs to the tenant and are common in retail and commercial real estate in the Chicago market.
Venture Capital
A form of private equity financing provided by investors to startups and early-stage companies with high growth potential. Venture capital investments are typically structured as preferred stock purchases with special rights including liquidation preferences, anti-dilution protection, board representation, and information rights.
Vesting
The process by which an employee or founder earns full ownership of equity over time. Standard vesting schedules are four years with a one-year cliff, meaning no equity vests until the first anniversary, after which equity vests monthly or quarterly. Vesting protects companies from departing founders or employees retaining large equity positions.
Whistleblower
An individual who reports illegal, unethical, or non-compliant activities within an organization to internal management, regulators, or law enforcement. Federal and Illinois laws protect whistleblowers from retaliation, and the SEC's whistleblower program offers financial rewards for tips leading to successful enforcement actions exceeding $1 million.
Workers' Compensation
A state-mandated insurance program that provides medical benefits and wage replacement to employees who are injured or become ill as a result of their job. Illinois law requires nearly all employers to carry workers' compensation insurance. Failure to do so can result in criminal penalties and personal liability for the business owner.