An LLC is technically a business, but it is considered incorporated and has more flexibility. However, if the following changes occur, a sole proprietorship will need an EIN:. You may also need a new EIN if any changes to ownership occur:. A business license and an EIN are both important when starting a new company. In many states, you can get either one first — or both at the same time.
Business licenses come from cities and counties, and each can establish its own requirements. 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:. While EINs are necessary for corporations and partnerships, most sole proprietorships actually do not need them.
When the grantor dies, his or her revocable living trust will become irrevocable and will require an EIN at that time. 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. When you apply for an EIN , you will need to have certain information available at the time of the application.
That information includes:. 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. 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. If you have a small home business with no employees and you are a sole proprietorship or a disregarded entity LLC, then you do not have to have an EIN.
However, you might find that it benefits you to have one. EINs are used for more than just filing taxes; they are often required for:. Additionally, having an EIN provides you with a certain amount of protection. You will use your EIN rather than your social security number on all of your business documents and contractors requiring a tax ID number.
Rather than having your social security number on multiple forms when you act as an independent contractor, you will have an EIN. Thus, you do not have to worry as much about identity theft. However, most sole proprietors don't need to obtain an EIN and can use their Social Security numbers instead. Even so, you may want to obtain an EIN anyway.
Also, some banks require you to have an EIN before they'll set up a bank account for your business. Theft of taxpayer's identities has become a rampant problem--identity thieves steal taxpayer's Social Security numbers and use them to file fraudulent tax returns and obtain tax refunds. For this reason, it's wise to keep your personal Social Security number as private as possible. Obtaining an EIN allows you to avoid having to provide your Social Security number to clients and other members of the public.
Using an EIN on your tax returns and payments also helps to show that you're an independent businessperson—in other words, an independent contractor and not an employee. This can make you more attractive to prospective clients. Obtaining an EIN is easy and free.
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