163 essential business formation terms explained in plain language.
A business structure that protects owners' personal assets from business debts and lawsuits while offering flexible tax treatment.
The legal document filed with the state to officially create an LLC. Includes the company name, registered agent, and member information.
An internal document that outlines how the LLC is managed, member responsibilities, profit distribution, and decision-making procedures.
A person or company designated to receive legal documents, tax notices, and government correspondence on behalf of the LLC.
A federal tax ID number from the IRS, required for hiring employees, opening business bank accounts, and filing business taxes.
A special type of LLC that allows creating separate 'series' within a single LLC, each with its own assets, members, and liability protection.
An LLC with one owner. By default, taxed as a disregarded entity (reported on personal tax return). Still provides full liability protection.
An LLC with two or more owners. By default, taxed as a partnership. Requires an operating agreement to define member roles and profit sharing.
The process of registering your LLC to do business in a state other than where it was originally formed.
A yearly filing required by most states to keep your LLC in good standing. Includes current business address, registered agent, and member information.
A federal filing required by FinCEN that reports the beneficial owners of the LLC. Required for most new LLCs since 2024.
A trade name or fictitious business name that allows your LLC to operate under a different name than its legal name.
The formal process of closing an LLC by filing dissolution documents with the state, settling debts, and distributing remaining assets.
A document from the state confirming that your LLC is current on all filings and fees. Often required for banking, loans, and contracts.
A legal doctrine where a court holds LLC members personally liable, usually because they failed to maintain proper separation between personal and business finances.
A tax structure where business profits 'pass through' to owners' personal tax returns, avoiding double taxation. Default for LLCs.
An IRS tax election (Form 2553) that allows an LLC to be taxed as an S-Corporation, potentially reducing self-employment taxes.
An annual state tax imposed on LLCs for the privilege of doing business in that state. Not all states impose this (notable: CA $800/year, TX based on revenue).
An LLC where all members participate in daily business decisions. Most common for small LLCs with few owners.
An LLC where designated managers run the business while other members are passive investors. Common for real estate LLCs and larger companies.
A legal protection that prevents creditors of an LLC member from seizing LLC assets. They can only receive distributions, not force them.
Another term for registered agent, used in some states like Ohio. Serves the same function — receives legal documents on behalf of the LLC.
The name used in some states (TX, DE) for the document that creates an LLC. Equivalent to Articles of Organization.
A filing to change information in your original Articles of Organization, such as the LLC name, registered agent, or member changes.
The ongoing requirements to keep your LLC in good standing: annual reports, franchise taxes, registered agent maintenance, and BOI reports.
The default structure when an individual starts doing business without forming a separate entity. Income flows to Schedule C. Provides no liability protection — personal assets are reachable by business creditors.
Two or more people doing business together without forming a legal entity. Each partner has unlimited personal liability for partnership debts. Most should instead form an LLC taxed as a partnership.
A separate legal entity owned by shareholders that pays corporate income tax at 21% federal. Dividends taxed again at the shareholder level, creating double taxation. Default structure for VC-backed startups.
A special LLC variant required in many states for licensed professionals — attorneys, physicians, CPAs, architects. Shields against ordinary business liability but not personal malpractice.
An LLC variant for social-purpose businesses. Structured to qualify for program-related investments from private foundations. Available in a handful of states (VT, MI, WY, IL, LA, ND).
A corporate form that legally commits to creating public benefit alongside shareholder profit. Distinct from Certified B Corporation, which is a third-party certification. Locks in mission-driven governance.
An entity organized for charitable, educational, religious, or similar purposes. May apply for federal §501(c)(3) tax-exempt status after state incorporation. Subject to strict rules on private benefit and lobbying.
A corporation with a limited number of shareholders whose shares are not publicly traded. Allowed to operate more informally than regular corporations. Recognized in about a dozen states.
A business owned and democratically controlled by its members, who share profits. Each member typically has one vote regardless of investment. Common in agriculture, retail, and housing.
An entity whose primary purpose is owning other entities or assets rather than operating a business directly. Used for asset protection, tax planning, and separating operating risk from ownership.
The 15.3% combined Social Security and Medicare tax paid by self-employed individuals on net self-employment earnings. 12.4% SS + 2.9% Medicare, with an additional 0.9% Medicare above $200K.
FICA taxes (Social Security + Medicare) paid jointly by employer and employee on W-2 wages. Total 15.3%, split evenly. Plus FUTA and state SUTA paid entirely by the employer.
A deduction of up to 20% of qualified pass-through business income. Made permanent by 2025 tax legislation. Phases out at higher incomes for specified service trades or businesses (SSTBs).
A category of pass-through businesses (law, health, consulting, accounting, financial services, etc.) whose QBI deduction phases out at higher income thresholds.
The IRS form an LLC or corporation files to elect S-corporation taxation. Must be filed within 2 months and 15 days of the target effective date. Late relief available under Rev. Proc. 2013-30.
The annual IRS information return for entities taxed as partnerships, including most multi-member LLCs. Allocates income to members via Schedule K-1. Due March 15.
The annual IRS return filed by S-corporations, including LLCs that have elected S-corp treatment. Flows profits through to shareholders via Schedule K-1. Due March 15.
The annual IRS return filed by C-corporations. C-corps pay federal income tax at 21% on net income. Due April 15 for calendar-year filers.
Filed with Form 1040 by sole proprietors and single-member LLCs taxed as disregarded entities. Reports business revenue and expenses to compute net profit or loss.
The per-owner tax form issued by partnerships and S-corporations reporting each owner's allocable share of income, deductions, credits, and other tax items.
Filed with Form 1040 to calculate and report self-employment tax on net earnings from self-employment above $400.
IRS information return required of foreign-owned single-member LLCs with reportable transactions. Penalty for non-filing: $25,000 per form per year. Most commonly-missed compliance requirement for non-resident owners.
The IRS voucher for quarterly estimated tax payments by self-employed individuals and pass-through business owners. Due April 15, June 15, Sept 15, Jan 15.
Federal income tax payments made four times per year by self-employed individuals and pass-through business owners to avoid underpayment penalties.
Taxing the same income twice — once at the corporate level and again when distributed as dividends. The main disadvantage of C-corp status vs pass-through entities.
The W-2 salary S-corp owner-employees must pay themselves for services rendered, to avoid IRS reclassification of distributions as wages. Typically 30-60% of profit for service businesses.
An elective state-level tax on pass-through entities that works around the $10,000 federal SALT cap. Adopted by over 35 states. Entity pays, owners get state credit.
The $10,000 federal limit on personal deductions for state and local taxes, imposed by the 2017 Tax Cuts and Jobs Act. Triggered the PTET workaround movement.
An IRC provision allowing businesses to expense equipment purchases up to $1.22M immediately in the year of purchase rather than depreciating over time.
An additional first-year deduction for qualifying property. 100% restored by 2025 tax reform. Stacks with Section 179.
The Modified Accelerated Cost Recovery System — the IRS-prescribed depreciation schedule for business property. 5 years for vehicles/computers, 7 for furniture, 27.5/39 for real estate.
A tax deduction for the business-use portion of a home used regularly and exclusively for business. Simplified method: $5/sqft up to $1,500. Actual method: percentage of all home expenses.
A written reimbursement policy allowing S-corps and C-corps to reimburse owner-employees tax-free for business expenses. Requires business-connection, substantiation, and return of excess.
The original value of an asset for tax purposes, typically purchase price plus improvements. Used to calculate gain or loss on sale.
The portion of gain on sale of depreciated property that is taxed as ordinary income up to the amount of depreciation taken. Limits the tax benefit of depreciation deductions at exit.
Profit from the sale of a capital asset. Long-term (held > 1 year): taxed at 0/15/20%. Short-term: taxed as ordinary income. Business assets may face recapture.
The 2021 federal law requiring most LLCs and corporations to file beneficial ownership information with FinCEN. Effective January 1, 2024. Enforcement subject to ongoing litigation.
The U.S. Treasury bureau that administers BOI reporting under the Corporate Transparency Act and enforces anti-money-laundering laws.
An individual with 25%+ ownership or substantial control of an entity. Must be reported in the BOI filing to FinCEN by most LLCs and corporations.
A state document verifying that an LLC exists and is in good standing. Different states use different names — all serve the same function for foreign qualification and banking.
Involuntary termination of an LLC by the state for failure to file annual reports or pay fees. Results in retroactive loss of liability protection.
The process of restoring an administratively dissolved LLC to active status. Requires back-filings, fees, and penalties. Typically available within 1-5 years of dissolution.
The threshold of in-state activity that triggers foreign qualification requirements. Typically includes physical presence, employees, or regular business transactions.
Sufficient connection to a state to trigger tax obligations. Physical nexus requires in-state presence. Economic nexus (post-Wayfair) kicks in at revenue/transaction thresholds.
Tax obligation triggered by economic activity in a state without physical presence. Typical thresholds: $100,000 in sales or 200 transactions annually.
The 2018 Supreme Court decision allowing states to require out-of-state sellers to collect sales tax based on economic nexus. Transformed e-commerce tax compliance.
Federal form verifying a new hire's identity and authorization to work in the U.S. Must be completed within 3 business days of start date and retained.
The IRS form employees complete to establish federal income tax withholding from their paycheck. Must be kept on file for each employee.
The IRS form businesses request from vendors and contractors to collect their taxpayer identification number for 1099 reporting.
The IRS form issued to independent contractors paid $600+ in a year. Reports nonemployee compensation. Due to contractors and IRS by January 31.
The IRS form issued by payment processors (Stripe, PayPal, Venmo) reporting card and third-party network transactions. Reporting thresholds changed significantly in 2022-2024.
Federal tax on employers funding state unemployment benefits. 6% on first $7,000 per employee. Effective rate usually 0.6% after state credit.
State-level unemployment insurance tax paid by employers. Rate varies by state and employer's experience rating (claims history).
State-required insurance providing wage replacement and medical coverage for employees injured at work. Required in 49 states (Texas optional) when hiring employees.
State authorization to collect and remit sales tax on taxable sales. Also called seller's permit or resale certificate in some states.
The person who signs and files the Articles of Organization. May or may not be a member of the LLC. Role typically ends after formation.
The corporate equivalent of an organizer — the person who signs and files the Articles of Incorporation to form a corporation.
The date the LLC legally comes into existence. Usually the filing date, but most states allow specifying a future effective date up to 60-90 days out.
A statement in the Articles of Organization describing the LLC's business purpose. Most states allow generic 'any lawful purpose' language.
An LLC with no set termination date, continuing until dissolved by member action or administrative dissolution. Most modern LLCs are perpetual.
The filing that creates a DBA — authorizing an individual or entity to operate under a name different from their legal name.
The legal principle shielding business owners' personal assets from company debts and lawsuits. Subject to exceptions: personal guarantees, veil piercing, personal torts.
A contractual commitment by an LLC member to be personally liable for a specific business debt. Common in SBA loans, commercial leases, and corporate credit cards.
A contractual promise to compensate another party for losses arising from specified events. Operating agreements typically indemnify managers for good-faith actions.
A contract restricting someone from competing with a business for a defined period and geographic area. Enforceability varies dramatically by state.
A contract preventing someone from recruiting employees or pursuing customers of a former employer. Generally more enforceable than non-competes.
A contract obligating parties to keep shared information confidential. Unilateral (one direction) or mutual. Typical term: 2-5 years, indefinite for true trade secrets.
Confidential business information deriving economic value from being secret. Protected under the federal Defend Trade Secrets Act and state laws. Protected indefinitely.
Creations of the mind protected by law — patents, copyrights, trademarks, trade secrets. Often an LLC's most valuable asset in knowledge-based businesses.
A word, phrase, or symbol identifying goods or services of a particular source. Registered with the USPTO for federal protection. Common-law protection from use alone.
Like a trademark, but identifying services rather than goods. Registered similarly with the USPTO.
Legal protection for original works of authorship — written works, music, code, images. Automatic upon creation; registration required to sue for infringement.
A federal grant of the exclusive right to make, use, and sell an invention for 20 years. Utility patents cover processes/machines; design patents cover ornamental designs.
The legal protection an LLC or corporation provides to its owners, insulating personal assets from business obligations. Also called the corporate veil or liability protection.
A legal doctrine allowing courts to disregard an LLC's separate existence and hold owners personally liable when the LLC is treated as the owner's alter ego (commingling, undercapitalization, etc.).
Mixing personal and business money in the same accounts or using business funds for personal purposes. The single most common cause of veil piercing.
The legal obligation of managers and officers to act in the best interest of the company and its owners. Primary duties: loyalty and care.
The fiduciary duty requiring managers to put the company's interests above their own. Prohibits self-dealing, competing with the company, and usurping opportunities.
The fiduciary duty requiring managers to act with the care an ordinarily prudent person would use in similar circumstances.
An implied duty in every contract (and LLC operating agreement) to act honestly and not frustrate the other party's legitimate expectations. Cannot be waived.
The right of LLC members to vote on major decisions, typically proportional to ownership but customizable in the operating agreement.
A voting threshold above simple majority — commonly 2/3 or 75%. Typically required for amendments, new members, dissolution, and major transactions.
A requirement that all members agree to a specific action. The highest voting threshold. Common for amending operating agreements or admitting new members.
A contract among LLC members specifying how membership interests will be bought and sold on triggering events: death, disability, divorce, retirement, or departure.
A contractual right requiring a selling member to first offer their interest to existing members on the same terms as any proposed third-party sale.
A contractual right allowing majority members to force minority members to join in a sale of the entity on the same terms. Prevents holdout minorities from blocking exits.
A contractual right allowing minority members to sell alongside majority members on the same terms. Protects minorities from being left behind after majority exits.
A situation where LLC members with equal voting rights cannot reach agreement on a material decision. Often resolved via buy-sell provisions or judicial dissolution.
A lawsuit brought by a member on behalf of the LLC against managers or third parties, when the LLC itself has failed to act. Rare but available for serious breaches.
An owner of an LLC. LLCs can have one member (SMLLC) or multiple members. Members have ownership percentages, profit rights, and voting rights per the operating agreement.
A designated decision-maker in a manager-managed LLC. May be a member or outside professional. Owes fiduciary duties to members.
Money, property, or services a member contributes to the LLC in exchange for ownership interest. Increases the member's capital account and basis.
A bookkeeping record of each member's equity in the LLC, tracking contributions, allocated income/loss, and distributions. Key for liquidation payouts and buy-sell pricing.
Money or property transferred from an LLC to a member. Tax-free up to basis for pass-through entities. Reduces the member's capital account.
A fixed payment to an LLC member for services or use of capital, regardless of profitability. Deductible by the LLC, ordinary income to the member.
The division of LLC income among members per the operating agreement, which may differ from ownership percentages if the allocation has substantial economic effect under §704(b).
A tiered distribution structure common in real estate and private equity LLCs. Common tiers: return of capital, preferred return, catch-up, promote.
A minimum rate of return paid to certain members before other members participate in distributions. Common in real estate syndications (8-10% preferred return is typical).
The share of profits allocated to the sponsor or manager of a syndication, above their capital contribution. Typically 20% of profits above the preferred return hurdle.
An equity grant giving the holder a share of future profits (and losses) without an interest in existing capital. Not taxable on grant if properly structured.
An ownership interest in an LLC that entitles the holder to a share of liquidation proceeds. Taxable on grant as compensation.
The process by which equity or benefits gradually become non-forfeitable. Typical startup vesting: 4 years with a 1-year cliff.
A vesting period during which no equity vests, followed by a large initial vesting event. Common in startup equity (1-year cliff at 25%).
Recording revenue when cash is received and expenses when cash is paid. Simpler than accrual. Most small businesses under $25M qualify.
Recording revenue when earned and expenses when incurred, regardless of cash flow. Required by GAAP. More accurate but more complex.
Money owed to the business by customers for goods or services delivered but not yet paid for. Tracked on the balance sheet as a current asset.
Money the business owes to vendors for goods or services received but not yet paid for. Tracked on the balance sheet as a current liability.
Total income from sales before any deductions. Distinct from net revenue (after discounts and returns) and gross profit (after cost of goods sold).
The bottom-line profit after all expenses, including cost of goods sold, operating expenses, interest, and taxes. Also called the bottom line.
Earnings Before Interest, Taxes, Depreciation, and Amortization. A measure of operating profitability commonly used to value businesses.
The net movement of cash into and out of a business. Distinct from profit — cash-flow positive businesses generate cash even while showing accounting losses.
Current assets minus current liabilities. Measures short-term liquidity. Most small businesses need positive working capital to operate.
The rate at which a business is losing money per month. Common metric for VC-backed startups. Runway = cash / burn rate.
How many months a business can operate at its current burn rate before running out of cash. Critical metric for startups.
A loan partially guaranteed by the U.S. Small Business Administration, offered through approved lenders. 7(a) most common (up to $5M); 504 for real estate.
A global payment processing platform widely used for online payments, subscriptions, and invoicing. Processing fees: 2.9% + $0.30 per transaction domestic.
A specialized bank account allowing a business to accept credit and debit card payments. Modern platforms (Stripe, Square) bundle merchant accounts with processing.
A transaction reversal initiated by a customer's bank, typically for disputed charges. Businesses lose the funds plus a chargeback fee ($15-$75).
A state, county, or city permit to operate a business in that jurisdiction. Distinct from formation with the Secretary of State. Requirements vary widely.
A state-issued credential permitting an individual to practice a regulated profession — medicine, law, accounting, engineering. Separate from business licensing.
A tax processing number issued by the IRS to individuals who do not qualify for an SSN. Used by non-resident business owners to file U.S. tax returns.
A 9-digit number issued by the Social Security Administration. Used as the default tax ID for U.S. citizens and residents. Required for most EIN online applications.
The IRS form used to apply for an Employer Identification Number. Can be filed online (instant), by fax (4-6 weeks for non-residents), or by mail (6-8 weeks).
The IRS letter confirming issuance of an EIN. Required by most banks for opening business accounts. If lost, request Form 147C (reassignment letter).
The IRS EIN verification letter issued when the original CP-575 is lost. Free; requires calling the IRS or writing in with verification.
A legal doctrine limiting creditors of an LLC member to a charging order on distributions, rather than reaching LLC assets directly. Strongest in Wyoming, Nevada.
A tax classification where an entity is ignored for federal tax purposes and its activity flows to the owner's return. Default for single-member LLCs.
IRS regulations (Treas. Reg. §301.7701) allowing eligible entities to elect their tax classification — disregarded entity, partnership, C-corp, or S-corp — via Form 8832 or Form 2553.
The IRS form used to elect how an eligible entity is classified for tax purposes — disregarded entity, partnership, or C-corporation.
A procedure under Rev. Proc. 2013-30 allowing late S-corp elections to be approved retroactively for up to 3 years, if the taxpayer acted in good faith.
A court decision that disregards an LLC's or corporation's separate existence and holds owners personally liable. Triggered by commingling, fraud, undercapitalization.
A commercial service providing registered agent duties — receiving legal documents on behalf of an LLC. Cost: $50-$300/year. Alternative to owner serving personally.
Another name for registered agent, used in some states. Must have a physical address in the formation state and be available during business hours.
The term used in Pennsylvania, Massachusetts, and a few other states for the document filed to form an LLC.
An LLC required by its operating agreement or state statute to pursue a public benefit alongside profit. A counterpart to the Benefit Corporation.
A company formed but left dormant ('on the shelf') for later use. Once common for building apparent business age. Now rare due to BOI and KYC rules that expose dormant entities.
By default, LLCs are taxed as pass-through entities — single-member as disregarded entities, multi-member as partnerships. LLCs can also elect S-corp or C-corp treatment.