As you might expect, company speak comes with its own vocabulary. Here's a breakdown of the key words you are likely to hear:
♦ Articles of Incorporation (often called the Articles of Association in other countries)—These are the company bylaws by which your operation is to be run.
♦ Audits—An audit is the inspection and preparation of your company's accounts. The books are assembled for a regular, specified period, normally 12 months, and presented according to your jurisdiction's accounting standards and principles. The audit will contain a statement of your financial position (the balance sheet) as well as financial activity (income statement) and cash flows. It is common to show comparisons between the current and previous year's performance so shareholders can appreciate the main trends.
Typically, firms, or their accountants, prepare the accounts and then an external auditor (can be the accountants) will pick a sample of the transactions (for example, 10 percent) to test the figure work for verification.
The auditor is required to provide a cover letter for the audit expressing their estimation of the financial state of the company and their satisfaction with its compliance to current legislation and practice.
Be aware that until you get into the swing, audits take up a lot of management time in both the preparation and signing off. It is advisable to have a senior director, preferably one who deals with the financial matters on hand throughout an audit to answer any questions.
If your jurisdiction requires audited figures to be submitted, make sure you get them in by the deadline, as there are normally penalties for late submissions. If you fail to submit your returns at all, the firm will be barred from trading.
♦ Corporate administrator—(a.k.a., the company secretary) The role of this position is to ensure all statutory paperwork concerning directors, registered offices, shares, annual returns, audits, and so on is completed correctly and promptly.
♦ Dividends—Payments made to each shareholder. Dividends can only be made from monies left in the firm after it has paid corporation or company tax. A dividend is paid against each and every share. (So if you own 100 shares your dividend payment would be 100 times higher than a person owning a single share.)
Note Tax law often provides for separate rates of taxation for earned and unearned income. Receiving money as dividends rather than income can affect how much you pay.
♦ Directors—The directors (often vice presidents in the United States) are the people who run the company. They are responsible for making sure it adheres to its legal obligations. The directors of the company constitute the main board.
In the United States, directors are managers of the shareholder's board. Vice presidents manage day-to-day development, manufacturing, and trading.
♦ Dormancy—Strange though it might sound, in some countries there is nothing to stop you setting up a firm and not letting it trade. You might maintain a dormant company because you want to reserve a particular trading name or get the paperwork out of the way. In such circumstances, annual returns still have to be submitted but legal requirements of annual accounts are not required providing your tax office is satisfied that the firm has not traded during the financial year.
♦ Articles of incorporation and memoranda of association—These are actually two separate documents and go by different names depending on where you live, sometimes they are unified to include the rules of association.
• Articles of incorporation—Set out the company's rules for running its affairs, including issuance and transfers of shares and directorial powers.
• Memoranda of association—These set out the factual information of the company: its name and registered office (must be within the jurisdiction, meaning no Swiss companies with registered offices in Reykjavik, for example) together with the objectives of the company.
♦ Incorporation—The act of creating the company or corporate body.
♦ Liabilities—What you owe your suppliers, normally money (see Chapter 17).
♦ Local jurisdiction—The local laws by which a company is bound.
♦ Registered office—An incorporated firm is a contactable firm. To ensure this, incorporation requires that every firm have a registered office to which all statutory correspondence is addressed. This does not have to be your office or home. If you choose anywhere else, such as your accountant's address, it is your responsibility to make sure you receive and deal with all company correspondence. To be efficient, registered offices should be near the main operation.
♦ Shareholders—The people who own the company. Shares are the mechanism by which their part of the ownership is determined.
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