The “Weeds:” Vocabulary and Definitions.
Simplified definitions of relevant financial terminology that may be useful in your search!
NOTE: These are informal definitions and explanations I have compiled to aid in my search. If you are interested in white collar crime and other such malfeasance, I recommend you contact the experts—like those featured in Higher Ed Heist!
Money laundering: Funneling illicit money into legitimate income sources and accounts, to make it spendable.
Companies
Limited liability company (LLC): Private equity firms manage funds through limited liability companies so that if a specific fund goes bust or is sued, the broader company portfolio is insulated from greater loss.
Formal roles in an LLC:
Company Official: has ownership interest and/or a management role in the company. Can be a “Manager,” “Member,” or “Authorized Signatory,” or combination.
Authorized Signatory: is authorized by LLC Members to enter into binding legal decisions on the LLC’s behalf. They may, but are not required to be, a Member.
Member: in a LLC has an ownership interest.
Manager: in an LLC serves in a managerial role. They may, but are not required to be, a Member.
Registered Agent: receives official communication on behalf of the company; does not necessarily have any formal status with the company.
LLCs have two basic management structures:
Manager-Managed: LLC Members elect a Manager. The Manager can be a Member of the LLC, or can be hired externally.
Member-Managed: LLC Members share management responsibilities.
NOTE! An individual can form a Single-Member LLC, insulating their personal assets from their business interests. In a Single-Member LLC, the business owner does not need to establish formal company bylaws to establish a management structure for their business. A single-member LLC is distinct from a Sole Proprietorship.
Sole Proprietorship: An individual can establish a Sole Proprietorship using their social security number and creating a business bank account. A Sole Proprietorship is attached to the individual as a person, which means they are personally liable for business debt, in case of lawsuits, etc.
Limited Partnership (LP): Private equity firms manage funds through limited partnerships, a structure which differentiates liability between General (active) and Limited (passive) partners, with active partners holding executive control and unlimited personal liability, and passive partners holding no control and liability limited to their investment.
Formal roles in an LP:
General Partner: Executive/managing partner.
Limited Partner: Passive investor excluded from formal/legal authority by the business structure.
NOTE! A company, rather than a person, can be named in Company Official/Registered Agent roles! A private equity firm may start a limited partnership and a limited liability company simultaneously, naming the LLC the General Partner of the Limited Partnership. This allows the firm to greater control while limiting the firm’s liability!
Doing business as (aka DBA, d/b/a, fictitious name): A company may want to conduct business under a name separate from the organization’s corporate name, in which case they can submit paperwork and pay a fee to establish an additional name or additional names the company can conduct business under.
Management Company: May not serve an immediate profit function, other than to manage multiple companies under the same umbrella.
Shell company: A company which may be used to hold assets, while not actively conducting business.
Offshore: A company/account associated with a person or business that is established outside of the United States, and therefore subject to local rather than U.S. tax laws, regulations, and local standards of scrutiny.
Charity:
Foundation: A foundation is a private charitable organization established for and dedicated to the support of one organization. With colleges and universities, foundations raise funds for scholarships, professorships, development projects, etc. They may also steward the school’s endowment. Because the foundation is a separate, private entity, while in support of public colleges and universities, foundations are typically exempt from major reporting requirements that public colleges and universities must adhere to. For this reason, some colleges pay for certain things through foundation, rather than college funds.
Endowment: Universities secure funds from donors which they steward over time, spending interest to fund school activities, programs, scholarships, funds, salaries, etc. Endowments, which can be in the millions or even billions, are managed privately. They may be managed by a school-affiliated foundation, or an external management company, which may or may not have a direct and unique affiliation with the school.
Restricted funds: Donor funds that are gifted with the requirement that they be spent toward a defined purpose, such as funding a particular program.
Unrestricted funds: Funds that can be spent for any purpose. In development terms, jackpot.
Fiduciary: In accepting an official fiduciary role, an individual or firm becomes legally required to act in the best financial interest of their client(s) without pursuit of personal gain.
Money function:
For-profit: A company designed for the purpose of making money without qualification.
Nonprofit: A company designed for the purpose of making money, with the caveat that profits must be reinvested in the company’s mission, rather than distributed to private individuals. Can receives federal tax exemption, through an application process to demonstrate the company meets certain mission-focused criteria and structural standards.
NOTE! Companies are establised at the state level, and apply for federal tax exemption.
Nonprofit tax classifications:
501(c)(3): Limits on lobbying spending. Secured through an application process. Donations are tax-deductible.
501(c)(4): Funds can be used substantially or exclusively for lobbying. Secured through an application process. Donations are not tax-deductible. 501(c)(4) companies are commonly associated with “dark money” funding of social, religious, and political causes.
527 (Political Action Committee (PAC)): Committee raise and spend funds toward campaigns for politicians or political causes. Donations are not tax-deductible.
Not-for-profit: Not the same as nonprofit! Similarly, profits must be reinvested in the company rather than distributed to private parties. However, not-for-profits exist for the benefit of company associates, rather than broader social missions. They are eligible for, however do not automatically receive, federal tax exemptions. Companies may receive limited state tax benefits. Donations may not be tax deductible. As they are not tax-exempt at the federal level, they do not file a Form 990!
Paperwork:
State-level (with the state secretary of state or similar agency):
Creation filing: The initial filing that establishes the business
Annual report: not like you or I might think of an annual report—a one page document containing basic business information that a business must fill out and pay to file annually in order to remain active and continue to conduct business.
Foreign entity: A business founded in one state can register to do business in another state. This business, in its non-home state, is referred to as a “foreign entity.”
Securities and Exchange Commission (SEC):
Form D: is a filing a firm must submit within 15 days of the sale of "unregistered" securities to investors. Like the private equivalent of an Initial Public Offering (IPO). Key information includes names of fund managers, including individuals and management companies; amount sold, date of initial sale, and number of investors.
Form ADV: Firms that sell securities must file a Form ADV annually or any time changes are made to the business structure. Form ADV is a 2-part form, which includes:
Part 1: Fill-in registration form.
Part 2: Brochure: Private equity firms are required to file and provide any investors and potential investors with the Form ADV Brochure, which is a plain-language outline of the firm’s ownership, leadership, management, processes, history, etc.
Form 3: When a company executive or director of a company owns interest in the company they file a Form 3 with the SEC to register this dual interest.
Form 4: When the company executive or director buys or sells stock in their company, they file a Form 4.
Nonprofits:
Form 990: Nonprofit agencies must file an annual Form 990 with the IRS which gives a cross section of the agency’s spending. Good to track what money is being spent where, with who.
