IRS EIN LLC: Everything You Need to Know
When learning about IRS EIN LLC, you will first need to know when to obtain an employer identification number and why an EIN is necessary.3 min read
- Start a new business
- Hire or plan to hire employees, even household staff
- Open a bank account that requires an employee identification number
- Establish a business account or obtain a loan or LOC
- Change the ownership or legal character of a current organization
- Create a trust, pension plan, corporation, partnership, or LLC
- Represent an estate after the death of an owner that operates a business
Many types of business entities need an employer identification number for operating and tax purposes, as described below.
Individuals and Sole Proprietorships
A sole proprietorship is defined as an individual who owns a business and is responsible for the business' losses and debts. A sole proprietor can choose to operate under their legal name or a fictitious business name, also referred to as a trade name.
This type of entity is a popular choice because it is inexpensive to start and simple to operate and file taxes. While a sole proprietorship does not require an EIN in most instances, obtaining one is good practice.
A partnership is a business entity that involves two or more people engaged in a trade or a business. The members of a partnership all contribute the property, money, labor, and skill and in return receive a share of the profits. A partnership is unincorporated, so it does not pay annual corporate tax. Partnerships use pass-through taxation, in which the income, losses, and deductions pass through the business to the owner's personal tax returns. A partnership requires an EIN to file taxes with the IRS and obtain business loans and banking.
Limited Liability Company
An LLC is a business structure unique to the United States, which allows owners to enjoy the pass-through taxation similar to sole proprietorships and partnerships while enjoying the limited liability for business debts like a corporation. The state in which the LLC is formed and does business determines the requirements for forming and running an LLC. Though LLCs can have any number of members, single-member LLCs are considered a disregarded entity by the IRS. An LLC must obtain an EIN or federal tax ID number.
A corporation is one of the most common types of business entities and requires the business to go through incorporation in the state it plans to perform most of its business. Once a corporation is founded, it remains a permanent fixture.
The two types of corporations are c corporation or s corporation. While both types have shareholders and are run by a board of directors, s corporations have more limitation on the type of owners as well as the number of shareholders. S corporations also differ in the way they are taxed, with a c corporation paying corporate tax as well as the shareholders paying taxes on earnings. An s corporation avoids double taxation by only taxing at the shareholder level.
A trust is a legal arrangement that follows specific rules for handling property being held for beneficiaries. Property is often placed in trusts to provide such things as:
- Immunity from estate taxes
- Probate avoidance
- Savings of time and money upon the death of the property holder
A trust consists of principal, interest, and dividends that are earned on the principal. The rules have been outlined by the person who originated the trust and determines who will be entitled to capital gains, income, etc. Many protections can be gained from a trust such as:
- Greater control over assets
- Protection of personal legacy from an heir's creditors
- Increased privacy from public probate
You can also choose to form a revocable trust, which is also referred to as a living trust. These trusts can be distributed while the originator is living and can be changed, altered, or canceled. Irrevocable trusts cannot be modified or terminated without the permission of the beneficiaries. Irrevocable trusts must obtain a federal tax ID number so that the grantor can transfer the assets and remove their ownership rights.
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