Business Formation Glossary: Essential Terms Defined

Business formation comes with its own vocabulary — and knowing the terms makes the process a lot less confusing. This glossary covers the essential words and phrases you'll encounter when forming an LLC or corporation, from entity types and ownership structures to filing requirements and financial basics.

The legal structure you choose for your business determines how you're taxed, how much personal liability you carry, and how your business is governed. The IRS and SBA recognize several main structures, each with distinct trade-offs.

Most first-time business owners are choosing between a sole proprietorship, an LLC, and a corporation — and the differences matter more than people expect.

Sole proprietorship

A business owned and run by one person with no legal separation between the owner and the business. There's no formation filing required, but the owner is personally on the hook for all business debts and legal judgments.

Partnership

A business owned by 2 or more people who share profits, losses, and management responsibilities. In a general partnership, every partner has unlimited personal liability. In a limited partnership, limited partners invest capital but don't manage the business and carry limited liability.

Limited Liability Company (LLC)

A legal structure that separates the owner's personal finances from the business. Members get limited liability protection — meaning business debts and lawsuits generally can't reach personal assets — while the business's income passes through to members' personal tax returns by default.

C Corporation

A corporation taxed as a separate legal entity. The business pays corporate income tax on its profits, and shareholders may also pay personal income tax on dividends — a situation commonly called double taxation. C Corporations can have unlimited shareholders and multiple classes of stock.

S Corporation

A corporation that has elected pass-through tax treatment with the IRS. Profits and losses flow to shareholders' personal returns, avoiding double taxation. S Corporations are limited to 100 shareholders, all of whom must be U.S. citizens or residents.

Forming a business entity means filing specific documents with your state and meeting ongoing requirements to stay in good standing. These are the terms you'll see most often during and after the formation process.

Articles of Organization

The formation document filed with the state to officially create an LLC. It typically includes the business name, address, registered agent information, and the names of the members or managers. Once the state approves it, the LLC legally exists.

Articles of Incorporation

The formation document filed with the state to create a corporation. It covers the business name, purpose, share structure, and registered agent. Some states call this the Certificate of Incorporation or Corporate Charter.

Registered agent

A person or business designated to receive official legal and government documents on behalf of your business — things like lawsuits, tax notices, and state correspondence. Every LLC and corporation is required to maintain a registered agent with a physical address in the state of formation.

DBA (doing business as)

A trade name or fictitious business name used by a business that differs from its legal registered name. A sole proprietor named Jane Smith who runs a bakery called "Morning Rise Bakery" would file a DBA. LLCs and corporations can also use DBAs to operate under a different brand name without forming a new entity.

Annual report

A periodic filing required by most states to keep your business in good standing. It typically confirms or updates basic information about the business — address, registered agent, ownership — and is accompanied by a state fee. Not filing on time can result in late fees or administrative dissolution.

Administrative dissolution

An involuntary dissolution of a business entity by the Secretary of State or a similar state authority. It happens when a business doesn't meet its ongoing requirements — most often by not filing an annual report, not paying franchise taxes, or not maintaining a valid registered agent. A dissolved business loses its legal protections.

Employer Identification Number (EIN)

A federal tax ID number assigned by the IRS to identify a business entity. Most businesses need an EIN to open a business bank account, hire employees, and file taxes. You can apply for an EIN for free at irs.gov — online applications are processed immediately.

Operating agreement

An internal document that outlines how an LLC is owned, managed, and run. It covers ownership percentages, voting rights, profit distributions, and what happens if a member leaves. Not all states require one, but having an operating agreement in place protects members and reinforces the LLC's legal separation from its owners.

Once your business is formed, you'll encounter terms that describe who owns it, who runs it, and how decisions get made. These show up in operating agreements, bylaws, and shareholder documents.

Member

An owner of an LLC. A single-member LLC has one owner; a multi-member LLC has 2 or more. Members can manage the business directly (member-managed) or appoint managers to handle day-to-day operations (manager-managed).

Shareholder

An owner of a corporation, represented by shares of stock. Shareholders elect the board of directors and vote on major corporate decisions, but they don't typically manage day-to-day operations.

Board of directors

A group elected by shareholders to oversee a corporation's management and major decisions. The board sets policy, appoints officers, and is responsible for acting in the best interests of shareholders. An advisory board of directors is a separate, informal group that advises the board but has no binding authority.

Bylaws

The internal rules that govern how a corporation is run — covering things like how meetings are held, how directors are elected, and how officers are appointed. Bylaws are the corporate equivalent of an LLC's operating agreement.

Agent

Anyone authorized to act on behalf of a business. Because a corporation or LLC can only act through people, it's important to define exactly which actions each agent is authorized to take — especially for contracts, financial transactions, and legal matters.

Acquisition

The act of one business obtaining control of another by buying all or a majority of its outstanding shares or assets. Acquisitions can be friendly (negotiated) or hostile (pursued without the target company's agreement).

Understanding basic financial terms helps you read your own business records, talk to your accountant, and stay on top of tax obligations. These are the terms that come up most often in the early stages of running a business.

Assets

Resources owned by a business that have economic value — things like cash, equipment, inventory, and intellectual property. Assets appear on the left side of a balance sheet.

Liabilities

What a business owes — loans, unpaid invoices, taxes owed, and other financial obligations. Liabilities appear on the right side of a balance sheet alongside equity.

Equity

The owner's residual interest in the business after subtracting liabilities from assets. In a corporation, equity is represented by shares of stock. In an LLC, it's represented by membership interest. Equity also refers to ownership stakes in the context of investment.

Balance sheet

A financial statement that shows a business's assets, liabilities, and equity at a specific point in time. It's one of the 3 core financial statements — alongside the income statement and cash flow statement — and gives a snapshot of what the business owns and owes.

Pass-through taxation

A tax treatment where business income is not taxed at the entity level. Instead, profits and losses pass through to the owners' personal tax returns. Sole proprietorships, partnerships, and LLCs (by default) all use pass-through taxation. S Corporations also qualify. C Corporations do not — they're taxed separately from their shareholders.

Franchise tax

A state-level tax charged to businesses for the privilege of operating in that state. It's not a tax on franchises — it applies to LLCs and corporations in many states regardless of whether the business is profitable. Not paying it is one of the most common reasons businesses face administrative dissolution.

If you're raising money for your business — or planning to — these are the terms investors and founders use. They come up most often in early-stage funding conversations and investment documents.

Seed funding

The first round of outside capital raised by a business, typically used to prove a concept, build a prototype, or get to early revenue. Seed funding can come from angel investors, friends and family, or early-stage venture funds.

Series A financing

A venture capital funding round that follows the seed stage. Series A capital is typically used to optimize the product, expand the team, and find product-market fit. It involves a formal valuation of the business and the issuance of preferred stock to investors.

SAFE (Simple Agreement for Future Equity)

An investment contract where an investor gives a business money today in exchange for the right to receive equity in a future funding round — without setting a valuation upfront. SAFEs are common in early-stage deals because they're faster and simpler than priced equity rounds.

Term sheet

A non-binding document that outlines the key terms of a proposed investment — valuation, ownership percentage, investor rights, and conditions. A term sheet is not a final agreement, but it sets the framework for the legal documents that follow. Review it carefully with a legal professional before signing.