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What Does the IRS Say About Employer Identification Numbers?

As you’re helping clients who are forming an LLC get all of their accounting and tax ducks in a row, the topic of an EIN will arise. Does a Limited Liability Company need an Employer Identification Number?

Feb 20th 2020
CEO and Founder CorpNet
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As you’re helping clients who are forming an LLC get all of their accounting and tax ducks in a row, the topic of an EIN will arise. Does a Limited Liability Company need an Employer Identification Number?

The answer? Well, it depends!

Let’s review what the IRS says about EINs and talk about what that means for single- and multi-member LLCs. By the way, this article is the first of a two-part series that will discuss some important information about EINs.

IRS Rules on When a Business Must Have an EIN

The IRS requires an individual or business to have an EIN when:

  • It has employees
  • It operates as a corporation or partnership
  • It files any of the following tax returns: Employment; Excise; or Alcohol, Tobacco, and Firearms
  • It withholds taxes on income, other than wages, paid to a non-resident alien
  • It has a Keogh plan
  • There's involvement with any of the following types of organizations:
    • Trusts (some exceptions apply)
    • IRAs
    • Exempt Organization Business Income Tax Returns
    • Estates
    • Real estate mortgage investment conduits
    • Non-profit organizations
    • Farmers’ cooperatives
    • Plan administrators

Of course, there’s additional information about EINs on the IRS website, but this covers the highlights of when a business will need one. Now, let’s zero in on what this means for LLCs.

Single-Member LLC and EINs

If an LLC has only one owner (member), an EIN may not be necessary—as long as the company is considered a "disregarded entity” for tax purposes and doesn’t have employees. Profits and losses flow through to the LLC member’s personal tax returns. In this situation, the LLC member can use their Social Security number for taxes.

A single-member LLC will need to obtain an EIN if it hires employees or if it elects to be taxed as a corporation (either a C?or S Corporation). Also, if an LLC’s situation matches any of the IRS’s criteria that mandate having an EIN, it must apply for one. Keep in mind that some states may require that a single-member LLC have an EIN to file its taxes.

Note that even if an LLC member doesn’t have to get an EIN, they may want to anyway for security reasons. While Social Security Numbers are linked to bank accounts and credit cards, EINs are not, thus adding a layer of privacy protection.?

Multi-Member LLC and EINs

Because a multi-member LLC is considered a partnership (by default) or a corporation (by electing to be taxed as either a C Corp or S Corp), it must have an EIN.

Ultimately, this requirement is helpful rather than a hindrance because having an EIN is one way to establish a clear separation between the business entity and its owners. It helps maintain that all-important corporate veil and safeguards the business owners’ Social Security Number information.

How to Obtain an EIN

EINs are free from the IRS, and the form to request them (IRS Form SS-4) is not complicated. An LLC’s responsible party who has an SSN, ITIN?or EIN may request up to one EIN per day. The IRS does allow for businesses to appoint a “nominee” (someone, such as an online business filing service, given limited authority to act on behalf of an entity) to prepare and submit the EIN application. The IRS is very clear, however, that the SS-4 form discloses that name and Taxpayer Identification Number (SSN, ITIN, or EIN) of the business’s true responsible party.

Your clients have the option to apply online, by fax?or by mail. When applying online, EINs are issued immediately. The IRS says that EINs requested by fax will be sent in about one week. When applying by mail, the process takes approximately four to five weeks. If you have international clients who need to obtain an EIN, they must do so by phone by calling 267-941-1099.

As you work with clients who are starting a new business, changing their business structure?or hiring employees for the first time, questions about EINs will inevitably arise. The IRS has detailed information on its website, including a?list of EIN FAQs that you and your clients might find helpful.

Stay tuned for my next post, EIN basics Part 2: When Does a Business Need to Change It's EIN? It will talk about the circumstances when a business that has an EIN may need to obtain a new one.

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