The language associated with starting a business is unique. Using the correct business terms makes you look more professional and helps others understand exactly what you are trying to communicate to them. There are also important legal reasons to use specific language when describing your business.
Here is a list of familiar (and not-so-familiar) terms that can help you learn the language of business:
1099 – A Form 1099 must be filed to report payments totaling more than $600 or more made to any individual for rents or services performed in the course of a calendar year. If this form is not filed, you may be subject to penalties from the IRS. 1099 Workers are not employees and are responsible for reporting their own income.
Accrual basis – A method of accounting that charges all income and expenses to the period to which they apply, regardless of whether money has been received.
Balance sheet – A financial statement that shows the total assets, liabilities, and equity of a business.
Corporation – A legal form of operation under which the business is recognized as a separate legal entity guided by a group of officers known as the board of directors. Corporations are owned by stockholders who invest capital into the corporation. Stockholders are not personally responsible for the debts of the corporation (unless they have personally guaranteed them), thus reducing their liability to the limit of their investment. Chartered or registered in the state in which it resides, a Corporation can acquire and sell property, lend money, sue, be sued, and can survive the death of its owners.
C Corporation – A Conventional Corporation, the C Corporation is the most common form of a corporation.
Contractor – Also known as “Independent Contractor.” Contractors are responsible only for the work they do. Contractors are generally specialists hired to do a specific job. Payments made to contractors are reported to the IRS on Form 1099 and are responsible for reporting their own income taxes. But be careful! The IRS has very specific rules determining the difference between a contractor and an employee. If the IRS feels an individual should have been treated as an employee, you will be liable for payroll taxes that should have been withheld and paid, plus any interest and penalties. To be a contractor, the person has to operating a business of his or her own.
Contract employee – An employee who is hired for a specific purpose defined under the terms of a contract. The term is sometimes used to describe Independent Contractors whose earnings are reported on Form 1099. However, use of the term in this manner is technically incorrect, since an independent contractor cannot be an employee.
DBA – “Doing Business As.” Also known as “Fictitious Name.” Any name other than your own under which you do business. For example, if your name is John Smith and the name of your business is “Paper Cutters,” you would register your business as John Smith, doing business as “Paper Cutters.”
Disclosure agreement – A form of protection that safeguards an idea during its developmental stage. Also see “Non-disclosure agreement.”
EIN – “Employer Identification Number.” Also known as “Employer Tax Identification Number.” The number issued by the IRS by which the employer is identified. Employers may apply for an EIN by filing IRS Form SS-4.
Entrepreneur – A somewhat vague term typically used to describe anyone who goes into business for themselves or who develops a new idea for a business venture.
Free agent – The term “free agent” was developed to refer to independent workers who are hired for specific, typically short-term, professional jobs. The term is somewhat vague, as it has been used by independent contractors, consultants, and almost anyone else who has their income reported on Form 1099.
Freelance – Freelance workers are independent contractors who perform work-for-hire. The term is most often applied to writers and other providers of specific professional services. Interestingly enough, the original “Freelancers” were knights who were available to be hired to fight in battles for feudal lords, hence the term “Free Lance.”
LLC – “Limited Liability Company.” A business form allowed in many – but not all – states. Operates like a traditional business partnership, distributing income and income tax to the partners which they report on their individual income tax returns. The LLC structure protects partners from personal liability for the business’s debts. LLC’s carry significant tax benefits over a limited partnership.
Non-disclosure agreement – provides legal protection preventing the sharing of confidential information or “trade secrets” that might benefit a competitor.
Partnership – an agreement between two or more individuals who are in business together. There are several types of partnerships.
Schedule C – the IRS form used for filing business income & expenses as an adjunct to form 1040
Self employed – anyone who is in business for him or herself. A self-employed person is responsible for filing their own quarterly taxes and other tax responsibilities. Their income is reported to the IRS on Form 1099.
Sole proprietor – a business with only one owner.
Subchapter S or S Corporation – A for of corporation that pays out all income proportionately to their shareholders, who then claim the income on their personal income tax returns.
Temporary worker – an employee hired on a temporary basis, typically for a specific purpose. Temporary workers are often hired to replace absent employees or for seasonal work, such as extra retail workers hired during the holiday shopping season. Temp workers can be hired as employees or independent contractors.
W2 – The form used by employers to report wages and earnings of an employee to the IRS.
Daniel Lamaute is CEO of InvestSafe.com a division of Lamaute Capital, Inc., an investment brokerage firm. Daniel has over 20 of experience in investment finance. He holds an MBA from Washington U in St. Louis, and advanced degrees from NYU and Harvard. For more information on Self-Employed 401(k)’s check out: http://www.investsafe.com
