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EIN (Employer Identification Number) for your LLC


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Next to sole proprietorship, the most common form of business structure for the independent vendor is the LLC. Since I am considering another go at vending and am going to be setting it up as an LLC, I had questions about whether I should get an EIN. In my research, I came across the following and found it very informative and helpful. It explains the reasons and benefits of an EIN in terms I can easily understand. Here it is for all those interested...

 

The Limited Liability Company (LLC) is a relatively new form of business entity created by statute by the individual states.  Congress, however, did not create a new tax classification for the LLC.  Instead, the IRS uses the tax entity classifications that have always been used for business taxpayers: corporation, partnership or sole proprietor. 

 

An LLC can elect to be classified as a corporation by filing a Form 8832, “Entity Classification Election.” By default, however, a single-member LLC will be classified by the IRS as a “Disregarded Entity” and treated as a sole proprietorship for income taxes.  All income and expenses of a sole proprietorship are reported on Schedule C on the owner’s income tax return (Form 1040).

 

Under the current rules, as explained in IRS Publication 15-A, disregarded entities may pay employment taxes either:

 

--using the owner’s name and Social Security Number (SSN), whereby the owner is considered to be the employer; OR 

 

--using the entity’s name and EIN (Employer Identification Number) whereby the entity is considered to be the employer.

 

Principals of one-member LLC’s are faced with the decision of whether to obtain an EIN for the LLC or to use the member’s SSN for filing employment tax returns and related reporting. While this may seem like a simple decision, in actuality it may be confusing. Consider this scenario:

 

Joe is a vending operator with a growing list of locations. For various reasons, Joe decided to create a formal entity for his business.  He organized a new LLC called “Joe’s Vending LLC.”  Joe is the only member of the LLC and he has one employee. Should Joe’s Vending LLC apply for an EIN?

 

Ignoring tax considerations for a moment, one of the reasons many individuals establish single-member LLC’s is for liability protection. Placing a business or an asset, such as rental real estate, in an LLC can protect the owner from some liability risks associated with the business or asset. Keeping the LLC’s assets and finances separate from the owner’s is important, and having a separate bank account is a good way to start. Getting a bank account, however, requires using an SSN or EIN. Joe’s goal of protecting his personal assets from his business risks would be furthered if he obtained a separate EIN for the LLC so that it could open a bank account in the LLC’s name, under its own tax ID number, rather than under Joe’s SSN.

 

The Confusing Part

 

The tax situation is less clear. Unless Joe elects otherwise, “Joe’s Vending LLC” is a “disregarded entity.”  As such, Joe’s Vending LLC will report its income on Joe’s personal tax return, Form 1040 using Joe’s SSN.  Joe, however, wants to obtain an EIN, a separate identification number for the LLC, because, after all, one of the reasons Joe organized the LLC was for the personal liability protection the entity gave him in case a customer chokes on a bouncy ball.  As further evidence that the assets of the LLC are separate from his personal assets, Joe wants to open a separate bank account for the LLC using a separate EIN rather than his SSN.  Joe realizes that he will have to be careful not to use his SSN and EIN interchangeably. 

 

In summary, I will be obtaining my EIN even though I will have no employees. The EIN will allow me to further separate my business liabilities from my personal assets. 

 

For the record, obtaining an EIN is simple and FREE. Do not pay for this service from companies online. Here is a link to the IRS website to obtain your EIN for free in minutes.

 

How to Apply for an EIN

http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/How-to-Apply-for-an-EIN

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