Does Sole Proprietorship Need an EIN Number?
A sole proprietorship is the simplest and most common forms of business.
But while this business structure is easier to form, you still need to comply with the licensing, zoning, and local requirements and regulations of your state.
While searching for the prerequisites of forming a sole proprietorship, you might often come across something known as EIN.
This EIN or Employee Identification Number is a nine-digit unique number assigned by the IRS to businesses for tax purposes. Just as individuals have SSN (Social Security Number), enterprises have EIN.
But will your sole proprietorship need an EIN too? Maybe or maybe not!
Let us have a look at when a sole proprietorship does and does not require an EIN.
Does a Sole Proprietorship Need an EIN?
In a sole proprietorship, a single proprietor owns and manages the businesses and all of its transactions. The single business owner pays business income tax along with his/her personal income tax payments.
So, the sole proprietor or owner of the business can just use his/her SSN for all the business tax purposes. This means that it is not legally compulsory for a sole proprietorship to have an EIN.
However, there are a few cases in which a sole proprietorship might need an EIN. Even if you do not relate to such cases defined by the IRS, a sole proprietorship can still get an EIN for the benefits it offers.
Cases in Which a Sole Proprietorship Needs an EIN
As per IRS, a sole proprietorship needs an EIN if-
- You want to hire employees
- You are buying an existing business
- You have 401(k) or Keogh
- You are inheriting a business
- You want to form a partnership, LLC or incorporate
- You want to file for bankruptcy
- You want to obtain a credit line
Moreover, many banks require almost every type of business to have an EIN for opening a business bank account. Also, as a business entity, you can obtain certain local business licenses if you have an EIN.
Even if you do not belong to any of the categories listed above, you can still apply for an EIN for the benefits it offers.
Benefits of EIN For Sole Proprietor
Following are two of the most important benefits of having an EIN as a sole proprietor-
- Protection Against Identity Theft- Without an EIN, you will have to use your SSN at many places. Identity thieves might access your SSN and then use the same for filing fraudulent tax returns.
- Business Credibility- Having an EIN is an easy way to improve the impression that people have of your sole proprietorship. An EIN establishes the fact explicitly that you are an independent owner and contractor and not an employee.
Applying for EIN
Applying for an EIN is easy and free. You can visit the IRS website and file Form SS-4 to apply for an EIN. Once the IRS validates your submission, you will receive your EIN within 1-2 working days. Apart from the online application, you can also apply for EIN through email, fax, and phone.
There are no restrictions by the IRS on the number of businesses you can own. But you will need a different EIN for each of your companies. Within 24 hours, you can only get up to 5 EINs.
This is irrespective of whether you are applying them for a sole proprietorship, LLC, corporation or partnership.
So, the decision about having or not having an EIN for your sole proprietorship is in your hands. While there are many benefits with EIN, you might also skip it entirely if you are starting a business. Just get the state or local permits or licenses that you need for your business, and you are good to go.
But ultimately, as your business will grow, you might need an EIN. Also, do consider the benefits of having an EIN even if you are not legally required to have it. EIN can make your business safer and more credible.
And with the availability of the online application, the whole process of applying and receiving an EIN is easy and quick. Moreover, it is completely free too. So, if you ever need the EIN in the future, just visit the IRS website to find all the help you need.