What do you know about employer identification numbers, or EINs? Chances are that unless you’re a small business owner you may not be entirely familiar with how these types of tax IDs work. What is an EIN and what makes having one so valuable to entrepreneurs starting small businesses? Let’s take a look at the functions that this tax ID has for small businesses.
What’s an EIN?
Before we detail some of the ways EINs are used, let’s define the term.
An employer identification number (EIN) is a unique nine-digit number issued by the IRS. It helps identify a business entity. An EIN is also referred to as a tax ID. It essentially acts as a corporate version of a social security number (SSN) when filing paperwork on behalf of the business. Startups may choose to use their EIN on important documents because the number is slightly less sensitive than an SSN and also identifies the business.
These types of tax IDs are also unique in that they do not expire. Once an EIN has been issued to a small business, they may use it and never need to worry that it may expire or require a renewal.
Now that you know what an EIN is and how it works, here are a few areas where having this kind of tax ID helps benefit businesses.
One of the most common uses for obtaining an EIN number is the ability to hire employees to work for your business. This is also a requirement. Without an EIN, small businesses are unable to hire, and pay, full-time employees.
Additionally, once a small business has been incorporated as a legal entity the owner is considered to be an employee. Because of this, it’s key to obtain an EIN so the IRS may track the activities of the business, collects payroll taxes, and generally makes sure it remains in compliance.
Opening a Business Bank Account
Most small businesses will open a bank account that is specific to their business. This helps to keep professional and personal bank accounts separate and ensures that the funds do not get mixed up in either account.
In order to open a business bank account, most banks will require reviewing a copy of your existing EIN. You will need to provide this information prior to opening a business bank account.
Incorporating or Forming a Limited Liability Company
Is it a requirement to obtain an EIN after you have incorporated your small business? Not exactly. However, it is advised that you obtain an EIN if you have formed an LLC, corporation, or partnership entity for your startup.
In the event that you formed a partnership, you may have partnered with at least one other person. Wouldn’t it be enough to simply use one partner’s SSN on documents relating to the business? It is still considered a good idea to obtain an EIN, as you will not be allowed to simultaneously use the SSNs of the partners to identify the startup.
What about C Corporations? Previously, C Corps were not required to have EINs. However, changes in tax laws now mandate that C Corps are required to file for tax IDs. This is critical for a C Corporation to have an EIN in order to open a business bank account, hire employees, and establish a credit profile. Speaking of which, that leads us to another important use for tax IDs…
Establishing a Credit Profile
Building corporate business credit is not something that be done through an entrepreneur’s personal credit history. They must obtain an EIN in order to not only open a business bank account, but to create and build business credit.
Doing this allows the IRS to assume that your business is in existence. Once its existence is determined, then all aspects of the business may begin to properly launch — with the help of an EIN.