When it comes to starting up a business, there are a lot of questions that can pop up as a new business owner. One of those questions can be ‘does my business need an EIN?’ and while the answer may seem like it is straightforward, it actually isn’t.
In this article we have listed a few points and have broken down the answer correctly; depending on how you form your business. You will have a better understanding of what an EIN is and why you need to obtain it as a business owner.
The businesses that need an EIN
When it comes to forming a business, you have to first understand and be clear about your business structure. Examples of business structures are LLC, non profit organisation, sole proprietorship, partnerships and corporations.
If your business will be running under the informal structure of a sole proprietorship, you do not need to get a business EIN. However, if you are planning on hiring employees under your sole proprietorship company, then an EIN is needed. This is because it is necessary to file pension plans and any other excise that is needed when hiring employees.
Single member LLC companies are only required to have an EIN if they are planning on hiring employees. The purpose for this is the same as listed for the sole proprietorship; however if you are thinking of being the only single member of an LLC company without employees, then you do not need an EIN.
As for multi member LLC companies and partnerships, it is required to obtain an EIN. One of the reasons for this is because the company is required to provide a partnership return and K-1s to the members of the LLC.
Both C and S type corporation companies are required to obtain an EIN. For the S corporation company, it is required for tax purposes, whereas for the C company it is required for the EIN tax reporting purposes.
If your business structure is a non profit organisation, you still need an EIN for tax requirement purposes.
What is an EIN?
EIN stands for Employment Identification Number and it is a Government issued business ID that also works as a Tax ID number. There are other names for it too, which are Federal Tax ID and TIN (Tax Identification Number). By obtaining an EIN, you have the chance to open a business bank account, hire employees and do tax reporting.
How do I request an EIN?
You can obtain the EIN for free online through the IRS website. It is a step by step application process online and is needed to be done after your business has officially been formed. You cannot obtain an EIN before you form your business, because in the application process it is required for you to provide a business formation date and legal business name.
This is why it is important to understand and form your business structure first, so that you are able to register your business and then continue to the important steps such as obtaining an EIN. When you are ready to get your EIN, you can take advantage of the assistance provided online by the IRS EIN assistant. There are online guides that provide further information about that.
By not obtaining an EIN for your business, you are only limiting yourself as an employer from not having the opportunity to open a separate business bank account that can help protect your finances, hire employees when needed and even help prevent identity theft. There are only benefits when getting an EIN and practically no disadvantages.
As a new business owner, it is very important to tick all the boxes towards success by following each step accordingly. It is necessary to have a clear perspective of the structure of your business and to take time to complete the registration process. Once that is completed, you can then move forward as a business by obtaining your EIN.