We hear those two EIN-related business formation questions frequently from those forming businesses for the first time and attorneys looking to provide their clients the best possible advice. The answers to both questions are nuanced, but before we dive into that, we’ll start with a simple, straightforward piece of information.
The IRS generally encourages all businesses to acquire an EIN. While they’re not required for all entity types, if the IRS recommends something, it’s typically the right decision to take their advice.
What Is An EIN
EIN stands for Employer Identification Number. Think of it as a Social Security number for businesses. This number contains nine digits and can be used for many different purposes, including:
- Opening a bank account
- Filing tax returns
- Hiring new employees
- And much more
While containing the same number of digits as a Social Security number, an EIN is styled a bit differently. An example EIN number would look like this: 12-3456789. EINs are provided exclusively by the IRS and are required for the vast majority of businesses. In certain cases, EINs are also referred to as an FEIN (Federal Employer Identification Number) or as a TIN (Tax ID Number).
Just like a Social Security number, they should be kept as private as possible.
When An EIN Is Required
There are many scenarios in which a business is required to obtain an EIN, which we’ll get to in a moment, but the simplest rule of thumb is that if your business has employees now or plans to have employees at some point in the future, an EIN is required.
The penalty for not obtaining a required EIN is fairly straightforward. You won’t be able to file the appropriate taxes for your entity and its employees, resulting in myriad complications and fines with the IRS.
So, what are more specific situations that require a business to obtain an EIN? Some examples include:
- If you have employees
- If the business is a corporation
- If the business is a partnership
- If you’re opening a bank account that requires an EIN
- If you file taxes for Employment, Excise, Alcohol, Tobacco, or Firearms
- If you withhold taxes on income other than wages paid to a non-resident alien
- If you have a Keogh Plan
- If you are involved in any of the following organizational types: Trusts, Estates, Real Estate Mortgage Investment Conduits, Non-Profit Organizations, Farmers’ Cooperatives, Plan Administrators
In other words, unless your business is a sole proprietorship without employees, the IRS requires that you obtain an EIN. However, these sole proprietors are required to use their personal Social Security number in lieu of an EIN, and for many types of bank transactions, the bank will require an EIN regardless. For this reason, among others, many sole prop owners choose to obtain an EIN.
Many sole proprietors who forgo their EIN find out midway through a business transaction that they are required to have one, which can delay the transaction and derail business.
How To Obtain An EIN
While you can submit an application for an EIN on the IRS website, the application can be daunting and the process is error-prone. For this reason, most businesses and corporate legal practices choose to partner with a company like Legalinc to ensure they obtain their EIN securely and efficiently.
Through our online dashboard, you can fill out the appropriate form to obtain your EIN in seconds. If you or your client’s business information is already stored in our platform, the process is even easier. Once your application is successfully submitted, you will receive your EIN in just a few minutes.
If you’re forming a new entity through our dashboard, you’ll be prompted to apply for your EIN during the formation process, taking care of both the formation & EIN processes in one action. If you’re ready to form your business and obtain your EIN today, you can get started with Legalinc for free!
We hope this post helped clear up any EIN confusion you may have had. If you’re taking the IRS-suggested step and need assistance obtaining your EIN, feel free to reach out to our Customer Success team at Legalinc or sign up for a free account today to get started!