Do You Need an EIN? Exploring the Benefits of an Employee Identification Number
You have done your homework. You’ve set up your location, found a funding resource, and even drafted a decent business plan. Now you hear that you need an Employee Identification Number, too. An EIN represents an important step in your business startup.
As you learn more about the Employee Identification Number (EIN) — otherwise known as a Tax ID Number, — it may be helpful to understand what it is and why having one is important for your business.
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What is an EIN?
Like a social security number, an EIN number is a nine-digit designation given to businesses by the IRS as identification for tax purposes. Businesses that have an EIN and are formed as a Limited Liability Company (LLC) have added protection from being sued as the company, in effect, has its own social security number.
It is free to obtain an EIN, and it can offer a lot of worthy benefits. Even if an organization isn’t a business per se, it can be practical to establish an EIN. Volunteer groups, scholarships, and even churches can file an EIN to simplify tax prep. Having an EIN can help not-for-profit organizations accept donations more easily. So whether you are a small business owner or just getting your organization started, filing for an EIN can be practical and will simplify your life.
Why Would I Want an EIN?
Obtaining an EIN can offer many benefits as you file your business taxes. In some cases, filing your taxes with an EIN can help you avoid an IRS audit, particularly if you have claimed home exemptions. By getting an EIN, you may also avoid identity theft. It is risky to use your social security number on all your business forms, but using your EIN can reduce the risk significantly.
Hiring employees is far simpler when you have an EIN, and it is easy to initiate a payroll program with this already established. In some cases, acquiring business loans is easier when you have an EIN. Think of an EIN as a sort of business passport — it enables you to navigate varying aspects of the startup world with a document that shows your validity as a business. It is a way to identify yourself and show a credential that essentially states: “My business is legit.” Not all businesses need an EIN, but you can apply for one, even if you are not required to.
Finding Out If You Need an EIN
Some businesses, such as corporations and partnerships, automatically need to apply for an EIN due to the nature of their startup, while others do not. It largely depends on the nature of your business. Sole proprietors do not need an EIN, nor do LLCs without any additional workers. When an LLC hires employees, the rule changes and you will need an EIN.
IRS.gov offers a simple six-question yes/no form that can clarify if your business needs to obtain an EIN. If your business does require one, it is an easy process but may take several weeks to complete. Startups can benefit from applying early on to avoid any delays during opening day or acquiring funding.
Your startup will benefit from obtaining an EIN. The process is simple and can offer a range of practical uses from enabling donations to facilitating tax prep.