There is wealth of information on the Internet about starting and running a small business. A small business entity can be set up in variety of fashions from tax and reporting perspective – sole proprietorship, LLC, S Corporation, C Corporation and so on. There are several aspects about sole proprietorship that are fundamentally different from other forms of entities, so it is important to understand the details and procedures for them, such as when you should apply for an EIN.
Who Requires an EIN?
To help understand what requires you to have an EIN, you need to know what EIN actually is. EIN stands for Employer Identification Number. It essentially serves the same purpose as Social Security number for individuals. Where your Social Security number applies to an individual, an EIN is for a business. Because sole proprietors are legally indistinct from their company, they can usually use their Social Security number for filing taxes or reporting income, as if it were an EIN. The most common reason sole proprietors need to get an EIN is because they are hiring other employees. It is important to note that employing the spouse of the owner is exempt from this rule. Additionally, an EIN is necessary to have a 401(k) retirement plan, form a partnership, or file for bankruptcy. Occasionally, banks require their clients to have one, as well.
How to Get EIN?
Luckily, it is very fast and easy to apply for an EIN. According to 2290tax.com, it usually takes around 15 days for the EIN number to be entered into the IRS computer system. It is possible to complete the application process completely online and the IRS has a tool to help sole proprietors with the procedure. Alternatively, you can apply via telephone or fax. Regardless of the way you decide to do it, you will need Form SS-4, which is easily accessible on the IRS website.
What are the Benefits of EIN?
Even if it is not required of you, it can still be wise to get an EIN. Many people feel more comfortable keeping their Social Security number secret. Without an EIN, you will have to share your Social Security number with clients and put it on tax forms. This can potentially create opportunity for fraudulent scams or even identity theft. More generally, your business looks more professional with an EIN. If you have any plans to expand, you will have to apply for an EIN eventually anyway. Having an EIN shows clients and investors that you are serious and thinking about the future. It can actually play a role in helping you expand.
As a sole proprietor, it is your responsibility to know if you need an EIN as well as the benefits of having one. Think about your long-term plans for your business to help your decision and decide whether it’s worthwhile taking this step.
