Business owners typically opt to obtain a tax ID, also known as an employer identification number (EIN), as they launch their companies. The U.S. requires all business structures, including partnerships, LLCs, and corporations, to have one. Self-employed individuals who only have themselves as an employee are an exception.
Generally speaking, to perform ordinary business processes, you’ll need to secure a tax ID before you begin conducting business. Let’s take a look at the primary reasons to get both a federal and state tax ID for your business as soon as possible.
The majority of business owners hire one or more employees. Normally, the larger a company gets, the more people are needed to help run operations. However, to have the ability to pay employees, a tax ID is a requirement.
While an EIN isn’t a necessary requirement to start a sole proprietorship, even if you think you might hire employees at a future date, it’s a wise strategy to be prepared and obtain the EIN. Keep in mind that you’ll need a tax ID to report and pay federal payroll taxes. Have that number ready!
Open a Business Bank Account
To keep business and personal assets separate, you’ll probably want to open a business bank account. However, without a tax ID to give the bank, the majority of financial institutions will deny you the ability to open a new account.
Additionally, while an EIN isn’t necessarily required to obtain a business credit card to keep your business and personal finances separate, it’s in your best interest to have one when applying for a credit card.
Obtain Business Loans
Whether you’re launching a new business or want to grow an established company, at some point, you’ll probably want access to cash to fund an expansion. In most cases, a bank requires borrowers to have a business bank account before applying for a loan.
Even if the bank doesn’t require a business account, an EIN is beneficial because it helps the lender verify the legitimacy of your company, determine its tax compliance, and show its financial history. The lender is going to want to ascertain if a company has good credit or if it’ll be a risk.
File Business Taxes
Business owners seeking to file personal and business federal taxes separately will need a tax ID to associate with their company. Many U.S. states also require businesses to secure an EIN to file their tax returns. In the absence of a tax ID when one is required, the IRS and state tax collection agencies may issue stiff penalties.
Obtain Business Licenses
Requirements for obtaining business licenses will vary from state to state. Businesses selling alcohol, tobacco, and firearms or requiring certain other specific licenses to operate will likely need a tax ID. It’s always best to be prepared and have all documents in order. Additionally, having licenses and proper tax documentation is a good way to boost your credibility as a new business.
Obtaining a tax ID for a business isn’t complicated. In fact, you can easily apply online or, if preferable, by telephone, fax, or mail. Applying online is, by far, the simplest and fastest way to obtain an EIN.