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What Is The Point Of An EIN Number?

Startupopinions January 25, 2017

When you’re trying to figure out which kind of business entity you want to be, one element you may be curious about is getting an employer ID number. This is a tax number issued by the IRS to companies, but do you need it? If so, do you know how to apply EIN online? Let’s break down the ins and outs of having an EIN number.

Which Entity Type are You?

Depending on the kind of business you are starting, you may have to get an EIN no matter what. Typically, partnerships and corporations have to create a separate entity because there are multiple owners and operators of the business.

However, if you are starting a sole proprietorship or an LLC, you may not have to get an EIN. Thus, the first step towards determining if it’s necessary is deciding which kind of entity you want to be.

Other Criteria for Getting an EIN

Although sole proprietors can usually use their social security numbers for tax purposes, there are a few instances where an employer ID number is required.

If you want to have employees, you need to create an EIN. This is because you can’t pay taxes for employees on your social security number. SSNs are designed for an individual only.

If you want to have a Keogh retirement plan, an EIN is required. The way that this plan is set up is you have to pay into it as an employer, not an individual. Thus, a separate tax entity has to be created.

Many financial institutions won’t allow individuals to open business bank accounts or lines of credit. If you want to do this, you will have to have an EIN to show that your company is separate from your SSN.

Finally, if your business has to file tax returns on alcohol, tobacco, firearms, or excise taxes, you need an EIN.

Bottom Line

Even if you are a sole proprietor, having an employer ID number is usually the best option because it offers a lot of flexibility and protection. Fortunately, all you have to do is file online and get your number in a day or so. You can use a third-party service to make this process even more painless.

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