Business and corporate law come with their own vocabulary. This glossary defines common terms that business owners, founders, and operators encounter—from entity formation through day-to-day operations.
A
Articles of Incorporation
The document filed with the state to create a corporation. It includes basic information like the company name, registered agent, share structure, and incorporator. In Washington, filed with the Secretary of State.
Also known as: Certificate of Incorporation (in Delaware and some other states)
At-Will Employment
The default employment relationship in Washington and most U.S. states. Either the employer or employee can end the relationship at any time, for any reason (or no reason), as long as it's not an illegal reason like discrimination.
B
B&O Tax (Business & Occupation Tax)
Washington's gross receipts tax on business activity. Unlike income tax, B&O tax is calculated on gross revenue—not profit. Rates vary by business classification (retailing, manufacturing, services, etc.). All businesses operating in Washington are subject to B&O tax.
Washington has no state income tax, but B&O tax applies regardless of profitability.
Bylaws
The internal rules governing a corporation's operations—how meetings are held, how directors are elected, officer roles, and other procedural matters. Bylaws are adopted by the board of directors and aren't filed with the state.
Buy-Sell Agreement
A contract between business owners that governs what happens when an owner wants to sell their interest, dies, becomes disabled, or otherwise exits. Establishes how ownership interests are valued and who has the right (or obligation) to buy.
C
Cap Table (Capitalization Table)
A spreadsheet or document showing who owns what percentage of a company, including founders, investors, and option holders. The cap table tracks share classes, prices paid, and how ownership changes over time through funding rounds and equity grants.
Certificate of Formation
The document filed with the state to create an LLC. Similar to Articles of Incorporation for a corporation. In Washington, filed with the Secretary of State.
Cliff
In equity vesting, the initial period before any ownership is earned. A typical "one-year cliff" means an employee earns nothing if they leave before their first anniversary, then earns 25% of their equity at the one-year mark.
Common Stock
The basic form of equity ownership in a corporation. Common stockholders typically have voting rights and share in profits, but are last in line (behind preferred stockholders and creditors) if the company is sold or liquidated. Founders and employees usually hold common stock.
D
Dilution
The reduction in ownership percentage that occurs when a company issues new shares. If you own 10% of a company and it issues new shares to investors, your percentage decreases even though your absolute number of shares stays the same.
Double Taxation
The taxation of corporate income at two levels: first at the corporate level (corporate income tax), then again at the individual level when profits are distributed as dividends. C-corporations are subject to double taxation; S-corps and LLCs avoid it through pass-through taxation.
E
EIN (Employer Identification Number)
A nine-digit number assigned by the IRS to identify a business for tax purposes. Also called a Federal Tax ID. Required for most businesses, especially those with employees, bank accounts, or tax filings. Free to obtain from the IRS.
Exercise
The act of using a stock option to purchase shares at the predetermined strike price. When you exercise options, you pay the strike price and receive actual shares of stock.
F
Fiduciary Duty
A legal obligation to act in another party's best interest. Corporate officers and directors owe fiduciary duties to the company and shareholders, including duties of care (making informed decisions) and loyalty (avoiding conflicts of interest).
Foreign Corporation/LLC
A corporation or LLC formed in one state but doing business in another. A Delaware corporation operating in Washington is a "foreign corporation" in Washington and must register with Washington's Secretary of State.
G
Garden Leave
A period during which an employer continues paying a departing employee while they're not working, often as a condition of enforcing a non-compete agreement. Washington's non-compete law requires garden leave for employees terminated without cause.
Good Standing
A status indicating that a business entity has met its state filing and fee requirements. Companies need good standing certificates for various transactions, like opening bank accounts or signing major contracts.
I
Indemnification
A contractual promise to compensate another party for losses they incur. Common in business contracts—for example, a vendor may indemnify a customer against claims arising from the vendor's products.
ISO (Incentive Stock Option)
A type of stock option with favorable tax treatment for employees. If specific holding period requirements are met, gains are taxed as long-term capital gains rather than ordinary income. Only available in C-corporations and only to employees (not contractors).
L
Liability Protection
The legal separation between a business entity and its owners that protects personal assets from business debts and lawsuits. LLCs and corporations provide liability protection; sole proprietorships don't.
Liability protection can be lost if the corporate form isn't properly maintained ("piercing the corporate veil").
Liquidation Preference
A right held by preferred stockholders (typically investors) to receive their investment back before common stockholders receive anything in a sale or liquidation. A "1x liquidation preference" means investors get their money back first; a "2x" means they get double.
M
Member
An owner of an LLC. Analogous to a shareholder in a corporation or a partner in a partnership. Members' rights and responsibilities are typically defined in the operating agreement.
Membership Interest
An ownership stake in an LLC, representing a member's share of profits, losses, and distributions. Can be expressed as a percentage or as units.
N
Non-Compete Agreement
A contract restricting an employee or contractor from working for competitors or starting a competing business for a period after leaving. In Washington, enforceable only for employees earning above a threshold (adjusted annually) and subject to additional requirements.
Non-Solicitation Agreement
A contract restricting a departing employee from soliciting the company's customers or recruiting its employees. Less restrictive than a non-compete and not subject to Washington's income thresholds for non-competes.
NSO (Non-Qualified Stock Option)
A stock option that doesn't qualify for the favorable tax treatment of an ISO. Gains are taxed as ordinary income upon exercise. NSOs can be granted to anyone—employees, contractors, advisors, board members.
O
Operating Agreement
The governing document for an LLC, defining members' rights and responsibilities, profit and loss allocation, management structure, and what happens when members leave. Similar to bylaws for a corporation, but typically more comprehensive.
Option Pool
A block of shares reserved for future equity grants to employees. Investors typically require companies to establish an option pool before funding, often 10–20% of fully diluted shares.
P
Pass-Through Taxation
A tax structure where business income "passes through" to the owners' personal tax returns, avoiding taxation at the entity level. LLCs, S-corps, and partnerships are pass-through entities. C-corps are not.
Preferred Stock
A class of stock with rights that are senior to common stock—typically liquidation preferences, anti-dilution protection, and sometimes guaranteed dividends. Venture capital investors usually receive preferred stock.
Profits Interest
An equity interest in an LLC that entitles the holder to a share of future profits and appreciation, but not the current value of the company. Often used instead of stock options in LLCs, with potentially favorable tax treatment.
R
Registered Agent
A person or company designated to receive legal documents and official correspondence on behalf of a business entity. Must have a physical address in the state of formation. Can be an owner, employee, or commercial registered agent service.
Restricted Stock
Shares issued to an employee or founder that are subject to vesting. If the recipient leaves before vesting, the company can repurchase unvested shares (typically at the original purchase price). Provides immediate ownership but with restrictions.
S
S-Corp Election
An IRS election (Form 2553) that allows a corporation or LLC to be taxed as a pass-through entity while maintaining corporate structure. Provides potential self-employment tax savings but has restrictions on ownership and share classes.
Strike Price
The price at which a stock option holder can purchase shares. Set at the fair market value of the stock on the grant date. If the company's value increases, the option holder profits by exercising at the lower strike price.
Also known as: Exercise price
T
Trade Secret
Confidential business information that derives economic value from being secret, such as formulas, processes, or customer lists. Protected under Washington's Uniform Trade Secrets Act as long as reasonable measures are taken to maintain secrecy.
V
Vesting
The process by which an employee earns equity over time. Standard vesting is over four years with a one-year cliff—meaning nothing vests until year one, then 25% vests, with the remaining 75% vesting monthly or quarterly over the next three years.
W
Work for Hire
A legal doctrine under which the employer (not the creator) owns the copyright to work created by employees within the scope of employment. For independent contractors, work for hire applies only to specific categories of works and requires a written agreement.
Important for tech companies: without a proper agreement, contractors may own the code or designs they create for you.
Have questions?
These definitions provide general information. For guidance on your specific situation, schedule a consultation.
Schedule a Consultation