The EIN: Employer Identification Number

EIN stands for Employer Identification Number, but you don’t have to have employees to need one. In fact, even if you never plan to have employees, you should still get an EIN for your business.

An Employer Identification Number is what the IRS uses to identify your business. It’s essentially a Social Security number for your business (in fact in some places the two are interchangeable).

Whether you are required to have an EIN generally depends on your business structure. If your company is a corporation or a partnership, you are required to have an EIN. If you operate as a sole proprietor an EIN is not legally required, but is still a good idea for a variety of reasons.

Legitimize Your Business

Treating your business as a real business rather than a hobby begins by setting up a true business entity. That might mean simply declaring you are in business as a sole proprietor, legalizing with a limited liability company, legal partnership, or establishing a true corporation with shareholders. It’s best to have your attorney or accountant help you decide which type of business is best for you.  With the exception of a sole proprietorship, each business entity requires you to apply for an EIN.

Protect Your Personal Assets

Another big reason to get an EIN is to help protect your personal assets. With identity theft on the rise, it’s important to keep personal information (such as your Social Security number) private. However, the government requires that anyone who pays you more than $600 in a calendar year needs to report it to the IRS. That reporting must include either a Social Security number or an EIN. If you don’t want to give your clients and affiliate programs your Social Security number, you will need an EIN.

Applying for an EIN

Getting an Employer Identification Number is a simple matter of filling out a form online, which you can find here: http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Apply-for-an-Employer-Identification-Number-(EIN)-Online . There is no charge to apply, and if you apply online you’ll receive your number almost immediately. Depending on the type of business you’re forming, you might find some of the questions a bit confusing. For this reason, it can make more sense to have your accountant or attorney apply for your EIN for you.

Example: some states allow you to form a limited liability company, or LLC, which helps small business owners protect their personal assets without the expense and hassle of forming a corporation. However, the IRS does not recognize an LLC alone as a legal business entity, requiring those businesses to file taxes as either sole proprietors or corporations. In this case, it makes sense to ask your attorney or accountant to file the paperwork for you. The small fee you’ll pay to have it done can be worth it. You avoid the headache of trying to figure it out yourself.

Since an EIN is linked to your business entity, you should also note that if your business structure changes, you will need to apply for a new number. If you start out as a sole proprietor and later decide to incorporate, your EIN cannot follow. Your business is now a new entity and will need a new “ID” number.

Don’t make the mistake of thinking since you’re “only one person” or that you “just work online” that you needn’t worry about legalizing your business with a formal business structure or the required paperwork that accompanies it. Being in business means taking that business seriously, and that starts with making sure your legal requirements are met and your personal assets are protected.

Do you have any advice or personal experiences to share regarding EINs or business structures?

 

Leave a Comment