What is EIN Used for?
The United States is known for its big businesses within it and how well they run. They offer the opportunity for everyone to get in on the business aspect as well. However, you must learn how to operate in business first. When learning the fundamentals of business it’s best you start with understanding the terms and vocabulary. One of the most important terms is Employer Identification Number (EIN). This is recommended as one of the first pieces of information necessary because more than likely if you want to start a business you will need to have one assigned to it.
By following proper guidelines such as getting an EIN for your budding business you can put yourself ahead of the crowd. Nonetheless, you must be mindful as not every business scenario requires you to have that number identification. Throughout this article, we hope for you to gain the knowledge of what an Employer Identification Number is used for.
Don’t Fall Behind
One of the keys to business, especially in the United States, is to stay ahead of the curve. In order to do so, that means you must have all the proper information to uphold your business. This includes having an EIN number amongst all other local, state, and government requirements.
The research will be your most valuable tool because you will need it before you start a business, during, and even after you are finished. Thus we urge you to take the information we give you but to go beyond even that in order to keep moving forward.
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Defining an Employer Identification Number
An Employer Identification Number (EIN) is a nine-digit number used to identify businesses and other certain entities. This is not to be confused with a social security number, which also has nine digits. An easy way to tell the difference between the two is because their numbers are formatted differently. A social security number is written as xxx-xx-xxxx whereas an EIN is in an xx-xxxxxxx pattern. The one similarity is that both are numbers that you only receive one of.
The EIN will be needed to open a business bank account, apply for business licenses and file your tax returns. Thus why it is imperative to apply for one prior to officially launching your business because you want to avoid any possible delays that will arise if you do not have it.
How To Apply for EIN
As with almost everything these days, you can find the application for an Employer Identification Number online. You will need to go on the IRS website and utilize the EIN Assistant to complete the process. Once you finish the process, it will take some time for it to be validated. After validation, you will be issued your EIN at no charge.
Who Needs An EIN?
Essentially an EIN is needed by a business that has employees on staff. However, businesses that do not retain employees also require it if they operate as a corporation or a partnership. The following is a list of a variety of the uses for EINs:
- Corporations: A corporation runs as a separate entity and is responsible for its own obligations and debts thus it needs an EIN. Also, various changes within a corporation can be a requirement for a new EIN as well.
- Partnerships: Most partnerships require EINs, except for certain joint undertakings for the sole purpose of sharing expenses.
- Limited Liability Companies (LLCs): Most LLCs must obtain EINs. If there are two or more owners they can choose to be recognized as a partnership or corporation but still need to obtain 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.
- Trusts: Certain types of trusts may require applying for an EIN. Those may include 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.
Some other situations EINs can be used are sole proprietorships, tax-exempt organizations, individual bankruptcy, and much more.
When is an EIN not necessary?
There are certain variations of businesses that are not required to have an EIN, some of which were previously just named. The first example is sole proprietorships due to the fact that in very rare scenarios you will need an EIN but mostly you will not. Similar to this are single-member LLCs because as stated prior if you are not employing anyone you will not need an EIN. 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.
Also if you have created a revocable living trust you will not require an EIN. This type of trust is a written instrument created during the lifetime of the Grantor (the person establishing the trust) and is effective during the lifetime of the Grantor with respect to the assets which are placed into the trust. These types of trusts use the grantor’s social security number.
Why You Might Need an EIN?
A short answer to this question is if you are planning to do anything business-wise the safest bet is to acquire an Employer Identification Number. However, more specific reasoning includes:
- Banking and finance: Most banks and credit unions require an EIN in order to open an account for any type of business.
- 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.
- Self-employed retirement plans: When establishing a Keogh or Solo 401k plan EIN is required to facilitate the plan’s federal tax treatment.
Frequently Asked Questions
“Can I use an EIN to apply for credit?” – You definitely can use EIN to apply for credit and it is honestly recommended that you do because it will contribute to your business’s credit report as opposed to yours. You want the business to have a well-built credit line just as you would yourself.
“Can I use my social security number instead of EIN?” – There are certain cases where you can substitute the social security number, but EIN provides protection against identity theft. EIN separates your personal from business information. Overall, it is not recommended to use your social security number over your EIN.
“What happens if I never use my EIN?” – Having an unused EIN has no repercussions to it. If anything, there are only benefits because it gives you an opportunity to have a head start in business if you choose that route eventually. It is free to apply for and to use so you might as well have one for “just in case” scenarios.
An Employee Identification Number has many uses across the business landscape. From giving you the ability to hire employees to open business accounts the range of usefulness is beyond measure. As stated earlier, even if you have no current business or plans to go into business you can take a future task off your shoulder by applying for it now. The most important piece is to have the information after completely reading through this article you will have what you need to know plus more.