starting a business

Starting a Business? Here’s How to Apply for a Tax ID Number

Sep 29th 2015
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A federal tax identification number – also known as an employer identification number (EIN) – is a nine-digit number assigned by the IRS to identify the tax accounts of employers and business entities. If you've run a business before, you likely already have a federal tax ID number. However, when you start a new business or purchase an existing one, you'll need to apply for a new number.

Fortunately, business owners can quickly obtain a new EIN online, but be careful: Depending on the type of new business being formed, a business owner may need to file additional paperwork when applying, and each business structure carries unique rules and considerations for the transfer of the organization to a new owner.

Here's everything you need to know*:

Sole Proprietorships
When do you have to apply for a new tax ID number?

  • If a business owner inherits or purchases an existing sole proprietorship that will remain a sole proprietorship.
  • If the structure of the business changes; for example, when a sole proprietorship becomes a partnership.

When isn't a new tax ID number required?

  • The business' name changes, without changing ownership.
  • The business' location changes.
  • The sole proprietorship expands to operate several businesses.

When do you have to apply for a new tax ID number?

  • If the structure of the corporation changes.
  • If the corporation becomes a subsidiary of a different corporation.
  • If the corporation merges with another entity to form a new corporation.

When isn't a new tax ID number required?

  • The nonaffected corporation in a merger continues to exist as it did prior to the merger.
  • Part of the entity moves to a division.
  • The corporation files bankruptcy.
  • The corporation changes names or locations.
  • The corporation becomes a tax-exempt corporation (see below).
  • The corporation reorganizes without changing its basic structure.

Limited Liability Companies
Because limited liability companies (LLCs) are formed under state statutes, the IRS doesn't classify an LLC as a specific type of business. Instead, the IRS considers LLCs to be sole proprietorships, partnerships, or taxable disregarded entities.

If an LLC is owned by one person, the IRS will treat it with the same expectations and standards as a sole proprietorship. If an LLC has employees, those employees must be paid under the LLC tax ID, which must have been issued after Jan. 1, 2009.

LLCs may be required to obtain a new tax ID under the following circumstances:

  • A new LLC is formed with more than one owner.
  • An owner forms a new LLC and opts for corporation taxation.
  • A new LLC is formed with one owner and has a previous excise tax debt.

Partnerships are only required to obtain a new EIN if they incorporate, change to a sole proprietorship, or if a new partnership is formed.

Tax-Exempt Organizations
While the IRS doesn't issue “tax-exempt numbers” specifically for exempt organizations, your organization does need an EIN to apply for tax exemption. And keep in mind: Organizations are subject to an automatic revocation of their tax-exempt status if they fail to file a required return or notice for three consecutive years.

How Long Does it Take to Receive Your New Tax ID Number?
According to the IRS, you can obtain an EIN immediately if you apply online. Other methods will require some waiting, however. If you fax a completed SS-4 form to the IRS's EIN Operation, they'll get back to you within two weeks. If you're applying by mail, you should allow four to five weeks to receive your new tax ID number. So if time is of the essence, do yourself a favor and apply online.

These steps may seem tedious when you're working day and night to get a new business off the ground, but by taking care of your ID number right off the bat, you'll save yourself a mountain of tax-time headaches.

*Note: An EIN should only be used in connection with your business activities; don't use your EIN and your Social Security number interchangeably.

About the author:
Gregory M. DeMars, CFA, has been the director of financial planning and analysis for Credibly since November 2014.Prior to joining Credibly, Gregory worked in investment banking, private equity, and corporate finance. He received his MBA in finance and strategic management from Indiana University's Kelley School of Business and his bachelor of science in finance and economics from the University of Dayton.

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