If you are starting a business, administering an estate, or are the trustee of an irrevocable trust, chances are that you will need to obtain a federal Tax Identification Number for your company. Whether or not you are a business owner with employees, the identification number is referred to as an Employer Identification Number, or EIN for short.
What Is an EIN?
An EIN is a nine-digit number used to identify businesses and certain other entities, described more fully below. While Social Security Numbers also have nine digits, EINs are easy to spot because they are formatted differently. Instead of using an xxx-xx-xxxx pattern, EINs use an xx-xxxxxxx pattern. Each entity that needs an EIN should have only one EIN.
Who Needs an EIN?
There are a variety of uses for EINs. Common uses include the following:
- Corporations – As a corporation is legally a separate entity and responsible for its own obligations and debts, it needs its own EIN. An existing corporation may also be required to obtain a new EIN in certain circumstances, including when the business’ name changes, the business becomes a subsidiary of another corporation, the business structure changes to that of a sole proprietorship or partnership, or a new corporate charter is created.
- Partnerships – By definition, a partnership involves two or more partners joining together for a business venture. Most partnerships require EINs, except certain joint undertakings for the sole purpose of sharing expenses. Existing partnerships may need to apply for and obtain new EINs when one partner takes over and establishes a sole proprietorship, if the partnership decides to incorporate, or if the existing partnership is dissolved and a new partnership is formed.
- Limited Liability Companies (LLCs) – Many LLCs must obtain EINs. If there are two or more members (owners), the business can choose to be recognized as either a partnership or a corporation, but it still must obtain its own EIN. The owner of a single-member LLC may not need to obtain an EIN unless the business has one or more employees or the business is declaring bankruptcy.
- Sole proprietorships – Most sole proprietors do not need to obtain EINs for their businesses; however, they may choose to do so, as discussed more fully below.
- Trusts – Trustees or other fiduciaries may need to apply for EINs for certain types of trusts. The “trusts” umbrella for EIN purposes also includes Ginnie Mae (GNMA) pools, Fannie Mae (FNMA) pools, custodianships, guardianships, receiverships, conservatorships, and escrow accounts. Irrevocable trusts, including testamentary trusts, need their own EINs because they are separate, legal entities once created and funded.
- Estates of deceased persons – When someone dies, their estate may need an EIN. Most often, this is required when there are assets that need to be probated before being distributed. The estate itself is responsible for the deceased person’s debts and obligations. The person applying for and using the EIN for an estate is considered a fiduciary, such as a personal representative or executor appointed by the courts to administer and distribute the deceased person’s estate.
- Employee benefit plans – Employee benefit plans, including health and retirement plans, need their own EINs. This includes single-participant Keogh and Solo 401(k) plans, profit-sharing plans, SIMPLE IRAs, SEP IRAs, and other employer-sponsored benefit plans.
- Personal service corporations – If your business’ primary activity was performing personal services by the owners, such as accounting, consulting, architecture, engineering, actuarial science, health, law, or the performing arts, then you may be considered a personal service corporation that needs its own EIN for tax purposes.
- Tax-exempt organizations – All nonprofit organizations are required to obtain an EIN before applying for 501(c)(3) tax-exempt status.
- Household employers and their agents – If you are employing someone to help in your home, you are considered a household employer and likely need an EIN to report payroll tax withholding. Similarly, if you are acting as an agent for a household employer, you can apply for an EIN for that person.
- Individual bankruptcy – When individuals file for bankruptcy under Chapter 7 or Chapter 11 of the Bankruptcy Code, the bankruptcy estate that is created is its own legal, taxable entity that needs its own EIN. Married spouses filing a joint bankruptcy petition will each need an EIN.
- Real estate mortgage investment conduits (REMICs) – REMICs (organizations that hold pools of mortgages) are treated as partnerships by the IRS. As such, they need their own EINs.
Why Might You Need an EIN?
You may need to obtain an EIN for a number of reasons, including business, estate, or trust banking, and hiring employees. Businesses also need EINs when they are required to file employment tax returns; excise tax returns; or alcohol, tobacco, and firearms returns. The following are reasons why you may need an EIN:
- Banking and finance – In many cases, banks and credit unions require a valid EIN in order to open a bank account for any type of business, an estate, or non-grantor trusts. Having an EIN may also be helpful for a business seeking to obtain financing or working capital.
- Employees – If you are hiring employees (whether one or many), you will need an EIN. This is the number the IRS will use to track your payroll tax remittances. Business owners establishing a form of business other than a sole proprietorship will also need an EIN, regardless of whether or not the business will have any employees. Your EIN will be used to track your business income taxes.
- Self-employed retirement plans – A self-employed person who decides to establish a Keogh or Solo 401(k) plan will need to obtain an EIN in order to facilitate those types of plans’ federal tax treatment.
- Situations where sole proprietors may need an EIN – Sole proprietors who are filing for bankruptcy for their business will need an EIN, as will those who purchase or inherit an existing business that they intend to run as a sole proprietorship going forward.
When Is an EIN Unnecessary?
While EINs are necessary for corporations and partnerships, most sole proprietorships actually do not need them.
Similarly, single-member LLCs do not need EINs either, unless the LLC is required to file excise tax returns or employment tax returns. When an EIN is not required, the LLC is said to be a “disregarded entity” because the business’ income and expenses are reported on the sole owner’s tax returns, so a separate tax return is not necessary.
Although “trusts” is one of the common types of entities that obtain EINs, you will probably not need an EIN if you have created a revocable living trust. That is because these types of trusts typically use the grantor’s Social Security Number during his or her lifetime. When the grantor dies, his or her revocable living trust will become irrevocable and will require an EIN at that time.
Why You May Want an EIN Even If It Is Not Required
Even though most sole proprietors will not need to obtain an EIN, it can be beneficial to obtain one in some cases.
First, sole proprietors who act as independent contractors can help protect their identities by obtaining and using an EIN with their clients, rather than providing their own Social Security Numbers.
Having an EIN may also make an independent contractor or sole proprietor appear more professional to potential clients. Some sole proprietors find this helps them land and solidify client relationships more easily.
Information Needed to Obtain an EIN
When you apply for an EIN, you will need to have certain information available at the time of the application. That information includes:
- the legal name of the entity that needs the EIN, and the trade name (if different);
- the person authorized to act for that entity (this may be a corporate officer, a partner, an executor, a trustee, etc.);
- the mailing addresses for both the legal entity and the person authorized to request the EIN;
- the responsible party’s name and that person's (or entity’s) Social Security Number, Tax Identification Number, or existing EIN. The IRS has stated that this information must be provided for the true principal officer, general partner, trustor, or owner who has authority and responsibility for managing, controlling, or directing the legal entity’s assets and funds;
- the type of entity (i.e. corporation, partnership, LLC, trust, estate, etc.);
- the number of LLC members if requesting an EIN for an LLC;
- the state or foreign country where the company is incorporated if requesting an EIN for a corporation;
- the reason you are applying for an EIN. You may have several reasons; however, you must choose one. Common reasons include starting a new business, hiring employees, banking purposes, creating a new trust, creating a new pension plan, changing the type of business entity, and purchasing an existing business (be prepared to also provide the date you purchased or acquired the business);
- the closing month of your accounting year. For the majority of businesses and others requesting EINs, a calendar year is used. However, check with your tax professional to determine whether it makes sense to use a different fiscal year;
- an estimate of the highest number of employees you expect to have in the next 12 months after applying (this may be zero);
- the first day you paid wages to employees, if applicable;
- the principal business activity you are engaged in. If you sell specific products, perform specific services, or produce specific products, be prepared to describe them;
- the applicant’s name, title (if applicable), telephone number, and signature; and
- the third-party nominee's contact information if you authorize one to act on your behalf.
Applying for Another Entity's EIN
If you are acting as a third-party nominee in obtaining an EIN for someone else, the IRS requires you to maintain certain information in your files. You must get signed authorization from the taxpayer (the person requesting a new EIN) on IRS Form SS-4.
Notifying the IRS of Changes
After you have obtained an EIN, you have an ongoing obligation to notify the IRS when certain events occur. For example, if your business’ address or name changes after your EIN has been issued, you will need to notify the IRS in writing, signed by an authorized person for your legal entity.
Similarly, a corporation wishing to be taxed as an S corporation must file Form 2553, and an LLC that elects on the EIN application to be taxed as an S corporation must file an additional form—Form 8832—with the IRS.
Finally, if your business closes or an estate or trust has been fully administered and distributed, you can notify the IRS so they can close the tax account associated with that EIN.
A final word of caution: Business owners and other responsible parties should ensure that their EINs are used only for business purposes, and not in place of the owner’s own Social Security Number.
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