Which Type of Business Entity Needs an Employer Identification Number (EIN)?
Businesses pay taxes. It is a truth as old as time. However, how a business entity pays taxes vary. For many, the Internal Revenue Service (IRS) requires them to file for an employer identification number (EIN).
The EIN, also referred to as a taxpayer identification number (TIN), is a unique number assigned by the IRS that allows it to monitor any payments, wages, or other financial transactions that occur through your daily business activities.
Furthermore, if you plan to open a business bank account, an EIN will help you establish one that is independent of your own personal account.
Does a general partnership need an EIN? What about an LLC taxed as a corporation? To find whether or not your business entity requires an EIN, keep reading.
Business Entities that Do Require an EIN
C Corporations: C corporations are those considered to be your “standard” ones. These entities are required to file a Form 1120 (Corporate Tax Return) and pay corporate-level taxes.
S Corporations: S corporations, defined by Subchapter S of the Internal Revenue Code, are pass-through entities. S corporations are required to have an EIN, but they file a Form 1120S (Informal Federal Return). Unlike the C corporations, any profits or losses incurred by the S corporation are filed along with the owner’s personal returns.
General Partnerships: General partnerships are required to have an EIN for taxation purposes. In a general partnership, all partners must report profits and losses on a Schedule K-1 on their personal income taxes.
Limited Partnerships: For taxation purposes, a limited partnership operates much the same as a general one and will need an EIN. A limited partnership typically has a general partner who manages the business and limited partners who act more as investors. The general partner must file a Return of Partnership Income Form 1065 that includes any losses, profits, and distributions issues to the limited partners. The other partners will then receive their Schedule K-1 from the general partner.
Multi-Member LLCs: The IRS treats multi-member limited liability companies (LLCs) much as they do a partnership. The LLC must submit a Form 1065; a Schedule K-1 with any allocated distributions must also be filed. Members will also be required to file a Form 1040 for their share of the LLC as well. This is true whether the LLC hires employees or not.
LLCs Taxed as Corporations: As with C and S corporations, if you opt to have your LLC taxed as a corporation, you must obtain an EIN.
Single Member LLCs with Employees: If you plan on hiring employees within 12 months, or already have employees, your LLC must have an EIN. The IRS may provide you with two EINs, however. Any employment taxes that are paid, must be reported through the use of an LLC-specific EIN. However, any finances passed to an LLC member must be reported under a member EIN instead.
Sole-Proprietorships with Employees: As with the LLC with employees, a sole-proprietor who hires employees with need to obtain and EIN too.
Business Entities that Do Not Require an EIN
Single-Member LLCs without Employees: Most single-member LLCs that do not hire employees will not need to obtain an EIN. A personal social security number (SSN) will suffice. However, if the LLC has a Keogh plan or transports anything that will incur a federal excise tax, an EIN will likely be needed.
Sole-Proprietorships without Employees: Sole proprietorships without employees can use their SSN as well. It is important to remember, however, that some lenders may not provide a loan without an EIN.
The nuances of the tax world can be confusing and hard to understand. If you run a business and would like to discuss taxes with a professional, call Royal Legal Solutions today to set up a consultation. Our professionals have years of experience helping clients make the most of their business while remaining in compliance with all laws and regulations.
Scott Royal Smith is an asset protection attorney and long-time real estate investor. He's on a mission to help fellow investors free their time, protect their assets, and create lasting wealth.
Learn How To Achieve Total Asset Protection While Growing Your Professional Network
Ready to know more than your attorney? Join our community platform where you'll get immediate FREE access to all our best educational resources for real estate investors. Including 8 Masterclasses, group mentoring replays, and much, much more.