(Author’s Note: I originally published this article in the Galion Inquirer on Saturday, Nov. 19, 2011) 

An Employer Identification Number (EIN) is an identifying tax number assigned to your business.  In simple terms, it functions like your social security number on your individual tax returns.  Does your new business need an EIN? Well, that depends on a few things.  Before we can answer that question we need to take a quick look at the legal structure of your business. The IRS has certain criteria for who is required to have an Employer Identification Number (EIN), and in many cases it will be the legal structure of your business that determines your need for an EIN, and also which tax forms you will be required to file.

The most common business structures are sole proprietorship, partnership, corporation, S corporation, and limited liability corporation (LLC).  Simple definitions of these structures are as follows:

Sole proprietor – an individual who owns an unincorporated business by himself or herself.  This is the simplest and most commonly used structure for a new business.

Partnership – is a business relationship between two or more persons who join together to carry on a trade or business.  Each partner contributes money, property, labor or skill, and expects to share in the profits or losses of the business.

Corporation – prospective shareholders exchange money, property, or both, for the corporation’s capital stock.  Profits are taxed to the corporation when earned, and then taxed to the shareholders when distributed as dividends.

S Corporation – a corporation, meeting certain criteria, that elects to be treated as an S corporation.  Normally an S corporation itself is exempt from income tax.  The shareholders report the S corporation’s income, deductions, losses, or credits on their individual tax returns.

Limited Liability Corporation (LLC) - is an entity that is statutorily authorized in certain states.  It is characterized by limited liability for debts similar to a corporation.  The management is by members or managers, and it has pass-through taxation similar to that of a partnership.

You can determine if your new business needs an EIN by answering the following questions. If you answer “yes” to any of them, you are required to have an EIN.

1. Do you have employees?
2. Do you operate your business as either a corporation or a partnership?
3. Do you file any of these tax returns: employment, excise, or alcohol, tobacco and firearms?
4. Do you withhold taxes on income, other than wages, paid to a non-resident alien?
5. Do you have a Keogh plan?
6. Are you involved with any of the following types of organizations?
   1. Trusts (except certain grantor-owned revocable trusts, IRAs, Exempt Organization Business Income Tax eturns)
   2. Estates
   3. Real estate mortgage investment conduits
   4. Non-profit organizations
   5. Farmers’ cooperatives
   6. Employee plans

If you answered “yes” to any of the above questions, you will need to apply for an EIN.  You can use one of these four methods to apply:

1. www.irs.gov, search: online EIN
2. Call EIN toll-free at 800-829-4933
3. Fax a completed Form SS-4 to the fax number listed in the SS-4 instructions
4. Mail a completed Form SS-4 to the address in the SS-4 instructions

Before taking any action, you should always seek the assistance of a professional who knows your particular situation for advice on your taxes, your investments, the law or any other business and professional matters that affect you and/or your business. You can find more information on the IRS website at www.irs.gov or at www.JohnLizotte.com.

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