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Do I need an EIN for my LLC?

Are you an entrepreneur and want to understand whether you need an EIN for their LLC? You have the right article. Read more below to understand all the details.

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What is an EIN Number?

The Employment Identification Number (EIN) is used by the Internal Revenue Service (IRS) to help identify a business entity. An entrepreneur may also find the term federal tax purposes identification number (tax ID number) that refers to the EIN. A business owner requires an EIN when starting a small business. However, there are exemptions where an EIN is not required. For example, if the business is a Limited Liability Company (LLC), or a single-member LLC. 

It is a nine-digit number that is similar to the Social Security Number. The IRS assigns this number. Every business requires it to file various tax returns, while individuals use a Social Security Number. The IRS, therefore, uses the EIN to track the company's tax returns. If the business is a single-member LLC and must file a separate tax return, the business owner requires an EIN. 

When a business acquires the EIN, it becomes official and therefore becomes easier to apply for loans and bank accounts. The business becomes a legal and financial entity. When one purchases or inherits a business, they operate as a sole proprietorship. Ensure that your LLC has an EIN. An LLC is also termed a disregarded entity. It ensures that the state tax laws are observed. These laws depend on the business structure.

Importance of an EIN

  • An EIN is used in opening a business bank account.
  • It is also used in separating the personal and business finances in a company
  • Ensures there are filing taxes for a business.
  • It also maximizes the tax-deductible business expenses and deductions. 
  • It also helps to build a business credit since one can apply for business credit cards, business lines of credit, and business loans. 

How to apply for an EIN 

When starting a business, one requires to apply for an EIN. The process is easy, and there are no fees

One can file through the IRS or LLC formation services.

IRS  

The first step is to ensure you have determined your eligibility for an EIN. This is done by ensuring the business is located in the United States (U.S), and you must have a valid taxpayer identification such as a Social Security. This online application ensures the business maintains its tax liability under the state statute. It applies to a new business for self-employed persons. The taxpayer identification number is essential and is also regarded as the federal tax identification number or federal tax id number. When the business is located in the U.S., then you are eligible for an EIN. However, the applicant for the EIN does not require to be a business owner. The applicant has to be a partner or an officer in the company. Secretaries can apply as long as the responsible signs Form SS-4 and fill the third-party designee section. Seek the legal advice of a lawyer. 

The next step is gathering information, such as reviewing the PDF version of Form SS-4. This is the form of the Application for Employer Identification Number. If the business entity is a company, then record the information and if it is a corporation, note down the state that the business is incorporated. Also, if the business has a multi-member LLC, ensure the members' numbers, addresses, and names are indicated. 

The other information required is the reason for applying, the date the business started, the description of the purpose of the business, also, the number of employees in the business, the first date the wages will be paid, and whether they would like to file an annual employer tax return. Therefore, the business owner applies for an EIN online, by mail, or by fax. Applicants that are overseas and wish to migrate to the U.S. apply by phone. The online IRS application allows an applicant to receive the EIN instantly once they electronically apply. Fax applications take four days, while mail applications take four weeks. 

LLC formation services

  • Make it easy and fast for one to apply for an EIN. 
  • There is a small fee that is required to apply for the EIN.
  • The business owner then gets instant access to the EIN through their dashboard. This helps in the recovery of the EIN. 

Changing EIN

Some occasions lead business owners to change the EIN. Examples of these situations include buying an existing business, converting a business from a different type of business entity, for example, from LLC to a corporation, and if an estate takes over ownership of a business after the death of an owner. Therefore, changing the EIN under the listed circumstances is possible. 

Canceling of EIN

IRS cannot cancel an EIN since the EIN is assigned as a unique permanent identifier for the business entity. Even if the EIN is not used, it cannot be reassigned, canceled, or reused in any other business. If a business owner decides to stop using the EIN, they write to the IRS requesting to close the business account.

Frequently asked questions

What is the difference between an EIN and a tax ID?

Tax is a common aspect that people encounter daily; hence individuals need to possess a tax identification number (TIN). Numerous distinct numbers can be utilized for tax identification purposes; hence understanding the numbers and their differences is vital. Employer Identification Number (EIN) differs from a tax ID in business. Therefore, Tax ID is an inclusive term utilized by the IRS for tax identification purposes. Additionally, a Tax ID is primarily used to track payments for people in a state. Typically, a Tax ID is applied before application of business registration. Examples of Tax ID include social security number (SSN) and Employer ID Number 9EIN)

On the contrary, EIN is a specific identification number assigned to businesses for taxation purposes. Notably, EIN is a type of tax ID that identifies businesses for tax activities. For a business to legally operate in the state, the business needs to seek federal EIN from the IRS. Additionally, businesses that have employees must seek EIN. Furthermore, an individual must have a personal ID number to apply for an EIN, whereas a Tax ID uses a generic term to recognize different taxpayers. 

When do I need a new EIN?

Usually, any business requires a new EIN when its structure and ownership have changed. However, altering the business name does not demand one to seek a new EIN. Individuals must visit the Business Name Change page to understand the actions and protocols that should be taken when changing a business name. Individuals must visit an IRS website to get detailed guidelines on applying for an EIN online. One will have to fill out IRS Form SS-4 and give specific details about the type of business entity, the number of employees, reasons for applying, and the company vision for the following year. 

An EIN is also needed when buying an existing business. This is because an EIN will provide evidence that the company exists as a legal entity and that one has completed the steps required by the federal and state authorities to legitimize the business operation. Moreover, buying an existing company is not simple because it comes with numerous challenges that may hinder the business's progress. 

On the contrary, a new EIN is required when converting a business to a different type of business entity. For instance, when switching from a corporation to an LLC and vice versa. Additionally, when the business operates as a sole proprietor and wants to transform into a partnership, it is essential to get an EIN. Similarly, a business can acquire an EIN if an estate takes over business ownership after the demise of the highest shareholder.

There are several actions that a business has to take when changing a business entity. Hence it is crucial to do so as few times as possible. In significant cases, a business must dissolve an existing entity to develop a new one. Moreover, starting as a single-member LLC and then forming a partnership is the easiest step to getting an EIN.

Does an LLC need an EIN to open a bank account?

It is essential to understand that an LLC needs an EIN to open a bank account. This is because a bank account is a vital requirement for any business. Additionally, the law requires business owners to have an EIN before engaging or employing contractors; hence the banks will demand the EIN before allowing one to open a business bank account. An EIN provides proof to any bank that an individual's business exists as a legal entity. Additionally, it shows that an LLC company has completed all the required paperwork as per the federal and state government authorities; hence the business can legally operate activities and generate profits. Notably, banks always want to get assurance or prove that the business is legal before opening a bank. Furthermore, having an EIN protects the owner's Social Security Number. It helps a business grow and provides more options when seeking financial help.

Nonetheless, it is crucial to understand that there are instances where business owners are allowed to open bank accounts without an EIN. Depending on the bank policies, some single-member LLCs are allowed to create saving and checking accounts without EIN as long as the company has no contractors, no pension plan tax, excise tax, and zero employees. 

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