Passive income and residual income have become so intertwined when it comes to creating an online business, that there is a need to define what is what. Often times, the a phrase is used that does not truly pertain to what is being represented on the internet.

Passive income as defined by businessdictionary.com is “Earnings from rent, limited partnership, or other sources of income (in which the earner does not take an active part), not including salary, wage, interest, or capital gain. Also called unearned income, passive income can be written off against passive losses.” This is the purist form of passive income as defined by the IRS and taxing agencies.

Residual income on the other hand also defined by businessdictionary.com is “Net income that an investment can earn over the minimum rate of return (time-deposit interest rate)” or “Royalty income that accrues to the owner of an intellectual property, such as art, books, lyrics, music, patents, etc.”

So how do these completely different terms get so misconstrued when used for online businesses and affiliate marketing?

The idea of passive income when used in the context of an online business would refer to placing a website on the internet that “does the work” for you. In other words, you do not play an active role in the business of a website that, let’s say, earns money from AdSense. Of course, if you take this stance, then you can only write off passive losses to the extent of passive income, and therefor limit your tax breaks.

Residual income, on the other hand, is an investment made that you will earn income over time. This investment can be anything that is tangible or non-tangible. In other words, putting a tangible investment of cash in a bond, you would expect to receive residual income in the form of interest payments over time. But an investment can also be intangible, such as a patent or copyright. If you invented a “widget” and receive royalties over time, that would also be considered residual income.

So in the realm of building websites that offer future income payments, either of the two phrases can be used and thus lies the reason for the confusion. Many people do want to build a business where income is generated without having to actively participate in the business, “passive income”. They also want those future payments to come in from the time investment they have made, “residual income.” Any way you want to say it, the benefit of an online business is tremendous.

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