EIN, sole prop, pass-through: the vocabulary of starting a business

The moment a side hustle earns real money, the vocabulary arrives: should you get an EIN, form an LLC, elect S corp status, worry about self-employment tax? The words sound like they belong to accountants, but the concepts are simple — and knowing them keeps you from paying $300 filing services for two free forms, or worse, picking a structure whose taxes you didn't understand.

The entity words: what you are

• Sole proprietorship — the default. You sell something, you're a sole prop; no paperwork required. You and the business are legally the same person: its debts are your debts, its lawsuits are your lawsuits.
• Partnership — the default when two or more people run an unincorporated business together. Same personal liability, multiplied by your partner's decisions.
• LLC (limited liability company) — a state-registered entity that separates business liabilities from your personal assets. The point is the liability shield, not taxes: a single-member LLC is taxed exactly like a sole prop by default.
• Corporation (C corp) — a fully separate legal entity that pays its own taxes. The structure for startups seeking investors; overkill for nearly all small businesses.
• DBA ('doing business as') — not an entity at all, just a registered trade name. 'Jane Smith DBA Sunrise Cleaning' is still a sole prop.

The ID words: how the government finds you

• EIN (Employer Identification Number) — the business's Social Security number. Free from IRS.gov in about ten minutes; anyone charging you for one is reselling a free form.
• You need an EIN if you have employees, form an LLC or corporation, or open business bank accounts — and even optional, it keeps your SSN off W-9 forms you hand to clients.
• Registered agent — the person or service designated to receive legal documents for your LLC. You can be your own; services charge $100–300/year mostly for privacy and reliability.
• Business license — a local permission-to-operate, separate from state formation. City and county rules vary wildly; check both.

The tax words: where the real money is

Pass-through taxation means the business itself pays no income tax — profits 'pass through' to your personal return. Sole props, partnerships, LLCs, and S corps are all pass-throughs; only C corps pay their own tax. The number that shocks first-year business owners is self-employment tax: 15.3% for Social Security and Medicare on your net earnings, on top of income tax, because you're now paying both the employee and employer halves. And nobody withholds anything for you — hence quarterly estimated taxes, four prepayments a year the IRS expects once you owe more than $1,000.

The S corp election: the phrase that saves (some people) money

An S corp isn't an entity you form — it's a tax election an LLC or corporation files with the IRS. The play: pay yourself a 'reasonable salary' (subject to payroll taxes) and take remaining profit as distributions, which dodge the 15.3% self-employment tax. On $120,000 of profit with a defensible $70,000 salary, the savings run roughly $6,000–7,000 a year — minus payroll service costs, a separate tax return, and heightened IRS attention to whether your salary is 'reasonable.' Below about $60,000–80,000 of consistent profit, the overhead usually eats the benefit.

The order of operations

1. Start selling as a sole prop; let revenue prove the idea before paperwork.
2. Open a separate business bank account immediately, whatever your structure.
3. Get the free EIN from IRS.gov the day you need a W-9 or a bank account.
4. Form the LLC when there's something to protect — real revenue, contracts, or any liability exposure.
5. Consider the S corp election when profit reliably clears ~$80,000 — with an accountant, not a YouTube video.
6. Set aside 25–30% of profit for taxes and pay quarterlies from day one of real income.

Choosing a structure: the decision on one card

Two rows of that table deserve a warning label. First, the LLC row's shield column says 'if finances stay separate' because that condition does the real work: the legal protection is only as strong as your bookkeeping. A dedicated business bank account, no personal expenses through it, contracts signed in the LLC's name — these habits are what a court examines when deciding whether the veil holds. Second, state fees vary enough to change the math: California charges LLCs a minimum $800 franchise tax every year regardless of profit, while other states charge under $50 — worth knowing before a $12,000-a-year side hustle takes on an $800 fixed cost for protection it may not need yet.

The other vocabulary cluster worth learning early is deductions, because they are the pay raise hiding in the paperwork. Business expenses — software, equipment, mileage at the IRS standard rate, a qualifying home office, health insurance premiums for the self-employed — subtract from profit before any tax is computed, meaning a dollar of legitimate deduction saves 30-40 cents for a typical freelancer. Self-employed retirement accounts stack on top: a Solo 401(k) lets the same person contribute as both employee and employer, sheltering far more than any W-2 job's plan would allow at the same income. The formation vocabulary protects your downside; the deduction vocabulary is where the structure starts paying you back.

The bottom line

The vocabulary sorts into three questions: what are you legally (sole prop, LLC, corporation), how does the IRS see you (pass-through vs. corporate, and maybe an S corp election), and which IDs do you need (a free EIN, state registration, local licenses). Most small businesses need less structure than the formation-service ads imply and more tax discipline than anyone mentions. Learn the words, file the free forms yourself, and spend the savings on an hour with a real accountant at the right moment.