What do you know about employer identification numbers, or EINs?
What is an EIN and what makes having one so valuable to entrepreneurs starting small businesses? Let’s look at the functions this tax ID has for small businesses.
What’s an EIN?
An employer identification number (EIN) is a unique nine-digit number. The IRS issues it to a small business. It helps identify a business entity. An EIN is also known as a tax ID. It 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 identifies the business.
These tax IDs are also unique because they do not expire. Once the IRS issues an EIN to a small business, they may use it. The business never needs to worry it will expire or require a renewal.
Here are a few areas where having this kind of tax ID helps benefit businesses.
Hiring Employees
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 incorporates as a legal entity the owner is 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 open a bank account specific to their business. This helps to keep professional and personal bank accounts separate. It ensures the funds do not get mixed up in either account.
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 an LLC
Is it a requirement to obtain an EIN after incorporating your small business? Not exactly. However, you should obtain an EIN if you form an LLC, corporation, or partnership entity for your startup.
If you form a partnership, you may have at least one other business partner. Is it enough to use one partner’s SSN on documents relating to the business? It is still a good idea to obtain an EIN. You may not simultaneously use the SSNs of the partners to identify the startup.
What about C Corporations? Previously, it’s not a requirement for C Corps to have EINs. However, changes in tax laws mandate C Corps must file for tax IDs. This is critical for a C Corporation to have an EIN to open a business bank account. This tax ID also allows businesses to hire employees and establish a credit profile.
Establishing a Credit Profile
Building corporate business credit is not done through an entrepreneur’s personal credit history. They must obtain an EIN to not only open a business bank account, but to create and build business credit.
Doing this allows the IRS to assume 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.
Obtain an EIN with MyCorporation. Contact MyCorporation at mycorporation.com or give us a call at 877-692-6772.