Whether you’ve recently started a business, or you’re experiencing business growth, now is the time to think about applying for and obtaining an Employer Identification Number (EIN), and what having one could do for your business.
In this article, we will explore what an EIN is, what kinds of businesses need one, when and why you need an EIN, and the process for applying for and obtaining one. We will also address common misconceptions about EINs.
Setting up a business for legal and tax compliance can be a challenging experience. Having dedicated, personalized legal advice can help make the process smooth and efficient. We’re here to help.
What is an EIN?
An Employer Identification Number (also known as an EIN or FEIN), is a unique nine-digit number assigned and used by the IRS to identify your business and to which to attribute its tax-relevant business activity. An EIN is like a Social Security number (SSN) but for businesses. While an SSN identifies an individual for personal taxpayer purposes such as gaining employment, reporting income, collecting benefits, and other record-keeping reasons; an EIN identifies a company for activities like hiring employees, providing benefits, business tax record-keeping and reporting, and a host of other day-to-day business activities.
Your business’ EIN will be attached to every action that has a tax implication for your business, ensuring that both your company and the IRS can be on the same page when it comes to tax time.
When Do You Need an EIN?
Almost every business in the United States requires an EIN and acquiring one as early as possible in the life of your business can be beneficial for several reasons. An EIN isn’t just for tax purposes, but for many everyday operational activities your business will engage in, such as:
- Operating as a corporation, partnership, or single- or multi-member LLC
- Opening business bank accounts
- Applying for business financing and loans
- Hiring and paying employees
- Keogh plans, retirement plans, and other benefits plans
- Managing and filing tax returns
Applying for an EIN is a free service provided by the IRS, but it can be helpful to have legal support from a provider like LLC Attorney to save you time and effort along the way, allowing you to continue to focus on your business — not on your company.
EIN for Sole Proprietorships
There are a few instances in which sole proprietors may not strictly need an EIN; for example, if you are a freelancer with no employees or retirement or benefits plans for yourself.
That said, there are many benefits sole proprietors can derive from having an EIN which you should consider when determining whether an EIN would be the right choice for your business. For example, having an EIN allows a sole proprietor to:
- Separate personal and business finances
- Avoid personal identity theft
- Establish your independent contractor status
- Administrate a Keogh or solo 401k retirement plan
- Hire employees
Many sole proprietors provide personal services like accounting, architecture, actuarial science, consulting, engineering, health, law, or even work in the performing arts. Any of these business activities could be considered a personal service corporation and would require an EIN.
EIN for LLCs, Corporations, and Partnerships
All corporations and partnerships require EINs and, with the introduction of the Corporate Transparency Act (CTA) on January 1, 2024, all LLCs, whether single-member or multi-member require an EIN, too.
Because corporations, partnerships, and LLCs are considered independent and separate legal entities, the most important reason for these businesses to apply for and obtain an EIN is for IRS tax and legal compliance, especially when it comes to managing and filing tax refunds.
Additional reasons that these business structures are required to have their own EINs are so that they can take care of their obligations and debts, hire and pay employees, access business banking accounts, credit cards, financing, and loans, and more.
How to Apply for an EIN
Applying for an EIN is a free process that can be completed in a single, continuous session online, by fax or mail, or in the case of international applicants, by phone.
Applying for an EIN starts with preparing an IRS Form SS-4 for the business. Once completed, the Form SS-4 must be submitted to all relevant agencies.
First, ensure that you have gathered the following information ready in advance, as you will need it to fill in the Form SS-4:
Now that you have this information prepared, what is the best method to apply for and obtain an EIN?
We will review the various methods below.
Applying Online
Because it's the most efficient method, we recommend applying for your EIN online, via the IRS website. Applying online generally results in your EIN application being completed during your session, for an instant turnaround.
Applying by Fax or Mail
You can expect longer completion times if you elect to mail or fax your IRS Form SS-4. Typically, fax applications take approximately 21-45 days, and your EIN will be faxed to you.
Alternatively, if you choose to mail your application, the completion time could be up to four weeks — provided all the information on your Form SS-4 is correct.
Applying by Phone
Businesses incorporated outside the United States take note: at this time, international applications can only be completed by phone. International applicants can call +1-267-941-1099 between 6:00 a.m. to 11:00 p.m. (Eastern Time) Monday through Friday to obtain their EIN.
Please note this is not a toll-free number.
Benefits of Having an EIN
Aside from being legally compliant, properly monitoring and filing tax filings and refunds, and avoiding IRS penalties, there are many benefits to having an EIN. While we’ve mentioned a few of these above, these benefits can make everything from day-to-day activities to planning and executing business expansion smoother and more efficient.
Some of the benefits business owners should look forward to when applying for and obtaining an EIN include:
- Enhancing business security and credibility
- Facilitating financial operations
- Enabling business banking
- Building business credit
- Simplifying employee management
- Protecting personal assets
- Facilitating licensing
- Business growth and scalability
For more information about each of these benefits and more, refer to our article Benefits of Having an EIN.
Common Misconceptions About EINs
There are a number of misconceptions and myths about EINs and whether different business types require one.
Myth One: Only Large Corporations Require an EIN
Almost every type of business requires one to be legally and tax compliant, no matter their size or structure.
Myth Two: EINs are the Same as a Business License
While they might seem similar, EINs and Business Licenses function differently and at different levels of government. While EINs are assigned by the federal government, business licenses are issued at local and state levels. In many instances, you could need both business licenses and an EIN.
Myth Three: Single-Member LLCs Do Not Require an EIN
As of January 1, 2024, with the implementation of the CTA, it is now required that all LLCs, regardless of the number of members or whether they hire employees, are required to have an EIN.
Myth Four: C-Corps May Not Require an EIN
In the past, it wasn’t a clear rule that all C corporations needed EINs. However, current tax laws have been revised to demand that C-Corps must apply for, and obtain, EINs.
Myth Five: A Single Owner Can Use the Same EIN for Multiple Businesses
Since every business is considered a distinct entity, even if they are all owned by the same individual or partners, it must file for and obtain its own unique EIN.
Wrapping Up
Obtaining an EIN is a fundamental step in establishing and maintaining a business in the United States. It not only ensures compliance with IRS requirements but also provides numerous additional benefits that enhance business operations and security. Whether you are a sole proprietor, an LLC, a partnership, or a corporation, understanding the importance of an EIN for your business, and the application process to be assigned one, is crucial.
By securing an EIN, you are taking a significant step toward the successful and lawful operation of your business.
Get Your EIN Today
While there’s no time like the present to obtain an EIN, burgeoning new businesses or small businesses might not think it’s necessary early on. But, consider your business plan — what do you want your company’s growth to look like three, five, or ten years from now?
Seeking legal advice early about applying for an EIN and setting up your business structure properly can assist in navigating the complexities you’ll face along the way. For more detailed insights and support in applying for an EIN, reach out to LLC Attorney. We would be happy to guide you through the process efficiently.
