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Why Every Startup Needs an EIN: A Comprehensive Guide for New Business Owners

Last Updated on July 8, 2024 by Adriaan

Starting a new business is an exciting journey filled with endless possibilities and a few challenges along the way. As a new business owner, one of the crucial steps you need to take is obtaining an Employer Identification Number (EIN). This nine-digit number, assigned by the Internal Revenue Service (IRS), is essential for a variety of reasons.

In this comprehensive guide, we’ll explore why every startup needs an EIN, the benefits it provides, and a step-by-step process to apply for one.

What Is an EIN?

An Employer Identification Number (EIN), also known as a Federal Tax Identification Number, identifies business entities. Just like Social Security Numbers (SSNs) are given to individuals, you should think of an EIN concerning your company. 

However, other forms of business organizations need to have this number besides what people usually think. Employer Identification Numbers are also required for partnerships and corporations, as well as for sole proprietorships.

Why Is an EIN Important for Startups?

1. Separating Personal and Business Finances

The main reason you should strive to obtain an EIN is to separate your personal finances from those of your business. Maintaining accurate financial records necessitates this separation to keep your personal assets safe. 

By acquiring an EIN, you can establish a bank account specifically for your enterprise. This way, you will differentiate personal transactions from profit-making activities within the firm. This separation also makes bookkeeping easier and increases your startup’s credibility and professionalism.

2. Simplifying Tax Filing

Paying taxes is obligatory but at the same time, it’s an intricate task when done by any businessperson. Another way through which filing taxes could be made easier would be by the adoption of an Employer Identification Number which serves as a tax identifier for any entrepreneur. 

 

It must accompany federal plus state tax returns and make sure that these documents are sent to the right business ventures. This is especially important if you plan to hire employees or if your business structure involves partners or shareholders. Furthermore, EINs streamline the filing of quarterly taxes and the annual return process, thus minimizing the chances of errors or penalties.

3. Establishing Business Credit

Building a business credit profile is critical for the survival and growth of any start-up. An EIN (Employer Identification Number) marks the beginning of an individual commercial credit card. For instance, by referring to your firm in terms of its employee identification number, one can easily access funds and negotiate better deals with suppliers who may sometimes extend their payment periods. It also helps lenders evaluate your financial strategy because they use it to gauge how creditworthy your company is.

4. Hiring Employees

An EIN is required for employers intending to employ human resources in their organizations. It’s used for reporting employment taxes, providing employee benefits, and handling payroll. Compliance with federal rules, such as W-2 issuance at year-end, becomes easier with an EIN. There will be no need to obtain new numbers in the future, even when starting as sole proprietors before expanding.

5. Compliance with Business Licenses and Permits

An EIN may be necessary for many local, state, as well as federal licenses and permits issued. Clearly stated on the application forms are requirements such as a business license or a health permit, which specify the need for every entity to have an Employer Identification Number (EIN). Owning an EIN ensures compliance with rules regulating businesses within your locality, thereby avoiding fines or production halts in case of any issues.

How to Apply for an EIN

Applying for an EIN is a straightforward process, and it’s free. Here’s a step-by-step guide to help you through the application:

Step 1: Determine Your Eligibility

To apply for an EIN, your business must be located in the United States or its territories. You must have a valid taxpayer identification number issued by the IRS, such as a Social Security number (SSN) or Individual Taxpayer Identification Number (ITIN).

Step 2: Gather the Required Information

Before you start, there are some important things that you need to know about your business, which include:

  • Legal name and trade name (if applicable)
  • Mailing address and physical address
  • Type of business entity (e.g., sole proprietorship, partnership, corporation)
  • Reason for applying for an EIN
  • Name and SSN or ITIN of the principal officer, general partner, or owner

Step 3: Apply Online

The simplest way to get your EIN is by going online at irs.gov. Applications are only accepted Monday through Friday and upon successful submission of your application; your Employer ID Number will be assigned immediately.

  1. Visit the IRS EIN application page.
  2. Click on the “Apply Online Now” button.
  3. Follow instructions and enter the required information.
  4. Review the information entered for correctness and then submit.
  5. Save or print out your EIN confirmation notice for future reference.

Step 4: Apply by Mail or Fax

If you choose not to use online services then mail/fax in Form SS-4 from the IRS website; complete this form before sending it over to the appropriate address/fax number stated in those instructions; processing timescales differ depending on how it was submitted but generally take roughly four weeks via snail-mail while faxing takes four working days.

How to Lookup an EIN

Once you have an EIN, you might need to verify it or find it in case you misplace it. Here is how to lookup an EIN:

Check Your Records

The easiest place to find your EIN is on the confirmation notice mailed by the IRS when you submitted your application. Beyond this, the number can be obtained from past tax returns, bank statements, and other communications with the IRS.

Contact the IRS

If you cannot find your EIN, then call 800-829-4933 which is the Business & Specialty Tax Line of the Internal Revenue Service. Prepare yourself for some personal safety-related questions like ‘What is your name?’; ‘What are the last four digits of your social security number?’; and ‘What is the name of your business legally speaking?’

Use the IRS’s Online Tools

Nonprofits or publicly traded companies can use the Exempt Organizations Select Check Tool from the IRS while other private organizations may charge a fee through third-party vendors who offer tax identification numbers.

Final Thoughts

Obtaining an Employer Identification Number (EIN) for your startup holds multiple benefits that streamline financial management systems, simplify tax documentation, and improve overall company operations. By acquiring an EIN, you will lay a firm foundation for your startup, ensuring compliance and affirming its credibility. 

 

This process is straightforward and free, making it accessible to every new business owner. Whether you are just starting or considering future growth, an EIN is essential for your business journey into entrepreneurship. Apply today to be ready to take off when starting up!

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