Also known as a Federal Tax Identification Number, an EIN (Employer Identification Number) is a number that identifies business entities.
This unique nine-digit number is needed to file your business taxes. Although not required for all types of businesses, it may prove beneficial for multiple reasons.
When do you need an EIN number?
As a rule of thumb, a business requires an EIN number when there’s been a change in its ownership or structure.
Read on to find out if an EIN is a requirement for you:
Sole Proprietors
As a sole proprietor, you’ll need an EIN if you are in the process of declaring bankruptcy, if you choose to incorporate, if you bring in additional partners to the business, or if you acquire an established business through purchase or inheritance.
If you alter your business’ name or location, you’re not required to acquire a new EIN number.
Corporations
A new EIN will need to be obtained if the secretary of state issues your business with a new charter or if you become a subsidiary of a corporation. You’ll also need one if you change from a corporation to a sole proprietor or partnership. If you are only a division of a larger corporation or have merged with another corporation, then you won’t be required to obtain a new EIN.
Corporations declaring bankruptcy, or changes in the business name and location, don’t need to acquire a new EIN.
Partnerships
As a partnership, a new EIN is required if you decide to incorporate, close an old partnership and establish a new one, or if your partnership has now become a sole proprietor. Declaring bankruptcy, and changing your business’ name or location doesn’t necessitate the acquisition of a new EIN number.
LLC (Limited Liability Company)
An LLC with a single member isn’t required to have an EIN, provided it doesn’t have employees or excise tax liabilities.
An LLC with multiple members will need an EIN regardless of how they are taxed, i.e., as a partnership or a corporation. If a single-member LLC changes to a multi-member LLC ,then an EIN will need to be obtained.
A Quick Question Guide
If you answer ‘yes’ to any of the following questions, you’ll need to obtain an EIN.
- Does your business employ people?
- Is your business classified as a partnership or corporation?
- Have any of the following types of tax returns been filed for your business: employment, alcohol, tobacco, excise, or firearms?
- Does your business have a Keogh Plan?
- Have you withheld taxes on incomes (excluding wages) and paid said taxes to a person who is not a resident of the United States?
- Does your business have any affiliations with trusts, non-profit organizations, plan administrators, real estate mortgage conduits, farmer’s cooperatives, or estates?
How do you apply for an EIN?
Online
The IRS offers a free online service for EIN applications. It is the most popular option as the customer’s information is validated in real-time, and an EIN can then be obtained immediately. Be aware that any website charging a fee for this process should be avoided.
Fax
The SS-4PDF application form can be completed and faxed. Once the information has been validated, the customer can receive their EIN within four work days.
The SS-4PDF application form can be mailed to the relevant address. This process can take up to four weeks to validate the information and issue the EIN.
Telephone
Call 267-941-1099, on weekdays, between 6 am and 11 pm Eastern Time, to obtain an EIN. Take note that this is not a toll-free number, and customers will be billed accordingly.
Advantages of an EIN
Whether or not it is legally necessary to acquire an EIN, there are many benefits that go hand in hand with obtaining one. Read on to discover more.
1. Identity Theft
Having an EIN ensures that your personal and business finances are kept separate. You won’t be required to share your social security number with business associates as your EIN can be used instead. This helps to protect your social security details, reducing the chances of your personal data being hacked. At present, the theft of EINs is not as prevalent.
2. Credibility
Solidifying client relationships is an important aspect for freelancers and independent contractors. By providing your EIN, you can show more credibility as a business. This can help with business growth in the long run.
3. Loan Applications
The processing rate for a business loan can increase quite significantly if you’re able to provide an EIN. Although it’s not usually required, having an EIN is needed to open a business bank account. These types of accounts, together with a set number of deposits, are often required for the application process, and opening a bank account often requires an EIN. Also, having an EIN allows you to build business credit. Loan companies often run business credit checks during an application process.
4. Trust
As a business owner, you may need to rely on third-party at times. These vendors may need to research your business credit. If you have an EIN, your business will appear more credible, giving you a greater chance for positive business affiliations.
5. Credit History
Acquiring an EIN is an important facet of creating a credit history for your business. A business credit evaluates your bill payment track record. This is done every time you apply for financial assistance, such as business loans and credit cards.
6. Employees
An EIN is required if you hire employees, allowing you to create a payroll system. If you already have an EIN before any hiring process begins, then this will limit any delays in the hiring process.
Conclusion
The answer to what is an EIN number should now be clear. An EIN should be viewed with as much importance as a social security number. Making this a priority for your business might be a worthwhile task with long-term benefits.