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TLDR
- Just like your social security number identifies you for various reasons, including paying tax, opening a bank account, or borrowing money, an employer identification number (EIN) does so for your startup.
- An employer identification number (EIN), also known as a federal employer or business tax identification number, is a unique 9-digit number assigned to your startup by the Internal Revenue Service (IRS) for federal tax purposes. This number identifies your startup for various business and tax reasons. For most startups, no matter the size, you need an EIN number to conduct business.
- An EIN number is a unique identifier for your startup, issued to you by the IRS for various tax and business reasons. The IRS has established guidelines determining when you are required to obtain an EIN.
- For example, if your startup has employees, if you structured your business as either a partnership or corporation, if your startup files excise taxes, or file certain tax returns for retirement or health plans, then an EIN is required. Additionally, if you are a multi-member limited liability company or buy a business, you need an EIN.
- Most banks require startups to have an EIN before opening a business banking account. With your EIN, the bank can more easily track your banking transactions. Additionally, as you grow, having an EIN will allow you to apply for credit through business credit cards or loans, similar to how you use your social security number for personal financial transactions.
- You’ll need an EIN to set up your payroll (when you hire employees) as well as reporting employee wages on a Form W-2 come tax time. Additionally, if you file state or local taxes, an EIN may be required when reporting and paying your taxes.
- Requesting an EIN is easy – and free. You can visit the IRS’s website to apply for an EIN online. Note, however, if you’re operating as anything other than a sole proprietorship, you must form your business with your state before applying for an EIN. As a sole proprietor, you can still apply for an EIN, but you’ll use your full name instead of a business name. Remember, though, you can always brand your sole proprietorship with a DBA.
- Once you obtain an EIN, you cannot cancel it with the IRS, just like you can’t cancel your social security number. When the IRS assigns an EIN to your business, it permanently becomes that business’s federal identification number.
Just like your social security number identifies you for various reasons, including paying tax, opening a bank account, or borrowing money, an employer identification number (EIN) does so for your startup. An employer identification number (EIN), also known as a federal employer or business tax identification number, is a unique 9-digit number assigned to your startup by the Internal Revenue Service (IRS) for federal tax purposes. This number identifies your startup for various business and tax reasons. For most startups, no matter the size, you need an EIN number to conduct business.
In this article, we will explore why you need to get an EIN, how to get one, and the benefits of securing an EIN for your startup.
What’s An EIN Number?
An EIN number is a unique identifier for your startup, issued to you by the IRS for various tax and business reasons. The IRS has established guidelines determining when you are required to obtain an EIN.
For example, if your startup has employees, if you structured your business as either a partnership or corporation, if your startup files excise taxes, or file certain tax returns for retirement or health plans, then an EIN is required. Additionally, if you are a multi-member limited liability company or if you buy a business, you need an EIN.
For required EINs, the IRS has an online questionnaire, helping you determine If an EIN is required for your startup. However, even if you don’t fall into any of the required categories, securing an EIN number is still beneficial to your business.
Let’s learn why.
Why Should My Startup Get an EIN?
For many entrepreneurs and founders, securing an EIN is not required by the IRS. However, there are many reasons why a startup should get an EIN, no matter the size.
First, most banks require startups to have an EIN before opening a business banking account. With your EIN, the bank can more easily track your banking transactions. Additionally, as you grow, having an EIN will allow you to apply for credit through business credit cards or loans, similar to how you use your social security number for personal financial transactions.
Secondly, you’ll need an EIN to set up your payroll (when you hire employees) as well as reporting employee wages on a Form W-2 come tax time. Additionally, if you file state or local taxes, an EIN may be required when reporting and paying your taxes.
Remember, however, your EIN is just as susceptible to identity theft as is your social security number. So, when opening bank accounts, filing taxes, or applying for a loan, be sure to implement best practices for privacy.
Which Business Entities Should Get an EIN?
Below, we will examine different types of business entities, discussing EIN requirements and benefits in more detail.
Sole Proprietorship
A sole proprietorship is “someone who owns an unincorporated business by himself or herself.” If your startup is structured as a sole proprietorship with no employees, and you don’t file any excise taxes or tax returns for retirement or health plans, no EIN is required by the IRS. However, if, as a sole proprietor, you have at least one employee (whether part-time or full-time), file excise taxes, or file tax returns for either retirement or health plan benefits, then an EIN is required.
Note that it’s a best practice to secure an EIN as a sole proprietor, even if not required, to open a business bank account and establish credit for the startup itself.
Single-Member LLC
A limited liability company (LLC) is a type of business structure created by state laws. If an LLC only has one member, then it is referred to as a single-member LLC. Note that a single-member LLC and a sole proprietorship are not the same. Where a sole proprietorship is not incorporated, a single-member LLC is, under applicable state law.
Typically, for most single-member LLCs, the profits and losses of the LLC are reported on the single member’s personal taxes. Because of this, the single member’s social security number will be used for tax filing purposes on Form 1040.
Like a sole proprietorship, if the LLC has employees, files excise taxes, or files tax returns for either retirement or health plans, the LLC will be required to obtain an EIN. Otherwise, the LLC is not required to get an EIN.
Best practices still dictate that an LLC should obtain an EIN to open a business bank account or build business credit, such as applying for a business loan.
Multi-Member LLC or Partnerships
Before discussing the necessity of an EIN for a multi-member LLC or partnership, we need to step back and define a multi-member LLC.
For tax purposes, multi-member LLCs are taxed as partnerships. Accordingly, multi-member LLCs must file a partnership tax return, just like a formal partnership business structure. Then, the LLC (or partnership, as the case may be) will provide K-1s to each member of the LLC to include in their personal tax filings. The K-1 identifies the profits and losses attributed to each partner.
Because multi-member LLCs are taxed as partnerships, the IRS considers them to be a partnership for purposes of obtaining an EIN. Thus, as stated above, if your startup is structured as a partnership (or a multi-member LLC), you must get an EIN assigned to your business.
Corporations
And that brings us to corporations. If you have structured your startup as either an S-corporation or a C-corporation, you must get an EIN for your company.
What’s an EIN for a DBA?
As your startup grows and you continue to refine your brand, you may choose to get a DBA, or “doing business as,” distinction. With a DBA, you can hold your startup out to the public under a different business name than your legal, registered business name. Branding yourself with a DBA will depend on satisfying requirements under your state law. In most states, you can visit the Secretary of State office online to see what requirements are necessary to obtain a DBA.
However, when asking whether you need an EIN for your DBA, the answer is no. Whether it’s an LLC, partnership, or corporation, your underlying business may have (or is required to have) an EIN. This EIN will also be used for any DBA you choose.
From an administrative perspective, the EIN process can make your life as a founder easier. For example, if you choose to have multiple DBAs for your startup, depending on the products offered or the customer targeted, you will only need one EIN.
The rules mentioned above on whether an EIN is required stay the same, no matter if you choose to operate with a DBA or not.
How Do I Request an EIN?
Requesting an EIN is easy – and free. You can visit the IRS’s website to apply for an EIN online. Note, however, if you’re operating as anything other than a sole proprietorship, you must form your business with your state before applying for an EIN.
When forming your EIN, the IRS will ask for the name of your startup and the date it was formed with your state. Thus, it’s essential to have this step completed before applying for your startup’s EIN.
As a sole proprietor, you can still apply for an EIN, but you’ll use your full name, instead of a business name. Remember, though, you can always brand your sole proprietorship with a DBA.
With online filing, you’ll get your EIN right away. However, you can also apply for your EIN on a paper application, known as Form SS-4, Application for Employee Identification Number. Once you’ve completed this form, you can then send it to the IRS via fax or mail. However, note that it may take up to a month to receive your EIN from the IRS.
How to Cancel an EIN Number?
Once you obtain an EIN, you cannot cancel it with the IRS, just like you can’t cancel your social security number. When the IRS assigns an EIN to your business, it permanently becomes its federal identification number.
However, “[i]f you receive an EIN but later determine you do not need the number (the new business never started up, for example), the IRS can close your business account.” To close your business account with the IRS, you must “send a letter that includes the complete legal name of the entity, the EIN, the business address and the reason you wish to close your account. If you have a copy of the EIN Assignment Notice that was issued when your EIN was assigned, include that when you write to [the IRS].”
Note that you must pay those first before the IRS can close your account if you have any outstanding taxes owed to the federal government.
Learn more with us
- Startup taxes
- What is an S-Corp vs. C-Corp?
- Why do startups choose to incorporate as C-corporation over LLC?
- How to change from sole proprietorship to LLC
- Learn more about accounting for startups
Access more guides in our Knowledge Base for Startups.
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