Business and Tax Glossary
The terms every freelancer runs into, explained in plain English. No law degree required.
LLC (Limited Liability Company)
A legal business structure that separates you from your business. If the business is sued or carries debt, your personal assets, such as your car, home, and savings, are generally protected. By default an LLC is taxed like a sole proprietorship, and it can later elect S-Corp taxation.
Start an LLC →S-Corp (S Corporation)
A tax election, not a business structure. An LLC that elects S-Corp status pays its owner a reasonable salary and distributes remaining profit without self-employment tax on the distribution. The election usually starts to pay off around $60,000 to $80,000 in annual profit.
Estimate your S-Corp savings →Self-employment tax
The Social Security and Medicare taxes self-employed people pay, currently 15.3% of net earnings (12.4% Social Security plus 2.9% Medicare). Sole proprietors and default LLCs pay it on essentially all profit.
Reasonable salary
The W-2 wage an S-Corp owner must pay themselves before taking distributions. The IRS expects it to match what a comparable employee would earn for the same work. Setting it artificially low is a common audit trigger.
Distribution
Profit an S-Corp owner takes out of the business beyond their salary. Distributions are not subject to self-employment tax, which is the source of the S-Corp tax advantage.
EIN (Employer Identification Number)
A free nine-digit number the IRS issues to your business, similar to a Social Security number for a person. You need one to open a business bank account, run payroll, and file business tax returns. Apply directly at irs.gov at no cost.
Registered agent
The person or service designated to receive legal documents and official state mail for your LLC. Every state requires one with a physical address in the state of formation. Using a service keeps your home address out of public records.
Articles of Organization
The document you file with your state to create an LLC. It lists the business name, address, registered agent, and owners. Once the state approves it, your LLC legally exists.
Operating agreement
An internal document that sets out how your LLC runs: ownership shares, profit splits, decision rights, and what happens if a member leaves. Most states do not require one, but banks and partners often ask for it.
Annual report
A recurring state filing that keeps your LLC in good standing, typically costing $15 to $300 depending on the state. Some states require it yearly, some every two years, and a handful not at all.
See your state’s requirements →Franchise tax
A state-level tax on the privilege of doing business, separate from income tax. California charges LLCs a minimum of $800 per year; Delaware charges $300. Many states have none.
Sole proprietor
The default status when you earn money on your own without registering a business. You and the business are legally the same, which means no liability protection and self-employment tax on all profit.
Pass-through entity
A business whose profit passes through to the owners’ personal tax returns instead of being taxed at the company level. LLCs, S-Corps, and partnerships are all pass-through entities.
Quarterly estimated taxes
Prepayments of income and self-employment tax that the IRS requires four times a year, generally due in April, June, September, and January. You owe them if you expect to owe at least $1,000 for the year.
Home office deduction
A deduction for the part of your home used regularly and exclusively for business. The simplified method allows $5 per square foot up to 300 square feet; the regular method deducts a percentage of actual home expenses.
Business license
A local permit to operate, issued by a city or county. It is separate from forming an LLC, and requirements vary widely by location and industry.
DBA (Doing Business As)
A registered trade name that lets a business operate under a name different from its legal name. Useful when one LLC runs several brands.
Form 2553
The IRS form an LLC or corporation files to elect S-Corp taxation. It is generally due within two months and fifteen days of the start of the tax year the election should take effect.
Bookkeeping
Recording and categorizing every business transaction so you know what you earned, what you spent, and what you owe. Clean books are the foundation of accurate taxes and every deduction you claim.
See our bookkeeping service →Reconciliation
Matching your bookkeeping records against bank and credit card statements to catch missing, duplicate, or miscategorized transactions. Done monthly, it keeps small errors from compounding into tax-season problems.
P&L (Profit and Loss statement)
A report showing revenue, expenses, and profit over a period. It answers the basic question of whether the business made money, and lenders and accountants will ask for it.
Estimated tax safe harbor
An IRS rule that protects you from underpayment penalties if your quarterly payments cover at least 90% of this year’s tax or 100% of last year’s (110% for higher earners).
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