An employer identification number (EIN) is an identification key for businesses provided by the Internal Revenue Service (IRS). They are used mainly for tax purposes, making it easier for the IRS to search a particular business in their database.
However, if the business is a sole proprietorship, the IRS accepts the Social Security number of the owner instead. There are, however, valid reasons for sole proprietorships to still get an EIN. Here are five reasons why businesses should apply for an EIN:
Offers Unique Advantages For Business
Most business owners who already have an EIN do not realize just how important its role is in their business. It is safe to assume that the business will not be able to exist and grow legally if it does not have it. For one, if you intend to hire employees, an EIN is needed. This helps the IRS make sure that the company does its part in paying taxes in whatever form it may take.
Banks also need an EIN before they open a business account for a company. If you want to build corporate credit for your business, an EIN is also required. With a bank account and a good corporate credit rating, your business will be able to apply for loans to help with expanding operations.
Other than that, an EIN is also needed to change the organization type, to establish pensions and trust plans, and to settle taxes.
Prevents Identity Theft
Even entrepreneurs can become targets of identity thieves. They can steal the business owner’s Social Security numbers, which can affect not just their finances but their reputation.
This is why using Social Security numbers on business documents is not advisable. Social Security numbers should always be kept private. Since EINs need much less protection, it is the better alternative for businesses.
Promotes Business Growth
There comes a time when the business owners need to consider buying another ongoing business for growth. Once your company reaches this milestone, you will appreciate just how easier things are with an EIN. Having one just makes a lot of things possible for the business.
Establishes Independent Entity
If you are courting clients, you are more likely to be hired if you have an EIN. When you utilize EINs for payments and tax returns, it will show the IRS and the clients that you are an independent contractor, not an employee. Otherwise, the clients may have to withhold at least 28 percent of your payments.
Required For Most Business Structures
For entrepreneurs who are planning to incorporate their business or establish an LLC, an EIN is a requirement that you have to check off your list. Since the business will become a separate legal entity, the IRS will need an efficient identifier to see if the company is collecting payroll tax. So, if you want to have the advantages of forming a LLC, you should submit your tax id number application sooner or later. The process is easy these days as you can apply online for your tax ID. But you have to know the whole process of how to apply EIN online.
But what if the company remains a sole proprietorship? Even when you are the sole employee of the company, the incorporated company should still have an EIN but not mandatory. Otherwise, the company may violate important corporate laws.