One of the most important aspects of starting a business and forming an LLC or other official legal entity for your business is that it gives you the ability to obtain an Employer Identification Number (EIN). Getting an EIN is an important step in making your business official in the eyes of the tax authorities and financial system.
Right now, the U.S. is seeing a large increase in the number of new business owners applying for EINs. According to recent data from the U.S. Census Bureau, as of mid-August 2020, applications for EINs were up 68 percent compared to the same time during the previous year.
There are several reasons why you need an EIN for your LLC or other business entity. Learn more about how to get an EIN and how this identification number can help your business grow.
Why Do I Need an Employer Identification Number to Start a Business?
You need an EIN for your business to make it “official” and legally registered with the IRS and the banking system. Your Employer Identification Number serves as a tax ID number for your business. You can think of it as a Social Security number for your company.
In the same way that U.S. taxpayers have a Social Security number (SSN) that makes them a “real person” in the eyes of the IRS, your business EIN helps make your business “real” and legitimate as a legal and financial entity to the Social Security Administration, banks, credit issuers and other parts of the financial and government regulatory systems.
Your EIN will help your business in several important ways. When you have an EIN for your business, you can:
- Open a business bank account.
- Build business credit by applying for business credit cards, business loans or business lines of credit.
- Separate your business and personal finances.
- File taxes for your business.
- Maximize your tax-deductible business expenses and deductions.
If you are operating as a sole proprietor and have not yet set up an LLC or formed a legal business entity for your business, you might be missing out on thousands of dollars per year in tax savings without an EIN and a separate financial “life” for your business. Getting an EIN can also help provide you with the peace of mind that comes from doing business in an “official” and more efficient way.
Do I Get an EIN Before or After My LLC Formation?
In general, you will need to form an LLC or other legal business entity for your business before you apply for your Employer ID Number. Start your business first, then get your EIN. Remember: the government cannot provide you with an EIN until you have created an official legal business entity that can be assigned an EIN. There needs to be an actual “business” that exists in legal form in order to qualify for a tax ID number for that business.
Incfile offers a $0 + state fee LLC formation package. Our service will do all the work for you and get you set up with a new business entity fast. Once your company is created, we can also assist you with getting an EIN.
What Is the Difference Between the EIN and Tax ID?
The EIN is a tax ID, but for a business instead of an individual. A Social Security number (SSN) is a taxpayer ID for an individual person; you are probably used to seeing your SSN on the top of your tax returns and when opening a bank account or dealing with other financial matters. An Employer ID Number (EIN) is the same type of number, but for a business entity instead of an individual person.
The EIN helps the IRS recognize your business, realize that your business exists as a legal entity and keep track of your business income and business records for tax reporting purposes. Many of the same reasons why you need a Social Security number (filing taxes, opening bank accounts, confirming identity, etc.) are also the same reasons why your business needs an EIN.
Does My LLC Need an EIN to Open a Bank Account?
In general, you will need an EIN to open a business bank account for your business. The bank will also typically want to see your Articles of Organization or Articles of Incorporation for your business. Having an EIN is proof to the bank that your business exists as a legal entity, that you have completed the required paperwork with state and federal authorities and that you are ready to do business and make money “as a business,” not just as an individual person.
What If I Need to Change My EIN?
Most businesses get an EIN assigned to them when the business is created — when the LLC is formed or when the corporation is incorporated. But sometimes, your business situation will change and you might need to change your EIN too.
There are some situations where you might need to apply for a new EIN:
- Buying an existing business and operating it as a sole proprietorship
- Converting your business to a different type of business entity (such as switching from LLC to corporation, or vice versa)
- An estate takes over ownership of a business after the death of an owner
Can the IRS Cancel My EIN Number?
According to the IRS website, the IRS cannot cancel your EIN. Every EIN is created and assigned as a unique permanent identifier for the business entity to which it is assigned. Even if the business entity never files a tax return or even if the business closes, the EIN will not be canceled, reused or reassigned to any other business.
If you decide that you no longer need or want your EIN, you can write to the IRS to close your business account. This can be done along with other aspects of closing a business.
How Can I Apply for an Employer Identification Number?
If you want to know how to apply for an EIN, the IRS website has an online application process with detailed guidance to apply for an EIN online. You will need to fill out IRS Form SS-4 and provide some details about your business, such as the type of business entity, reasons for applying for an EIN, how many employees you expect to have within the next 12 months and more.
If you want help navigating this process, Incfile offers a fast, easy service to help you file for your Federal Employer ID Number for an affordable fee. This service can save you time by taking care of the filing and paperwork for you. And if you decide to incorporate your new LLC using Incfile, our Gold and Platinum packages include an EIN with the service.