EINs and Different Business Structures
Rule 1: If you plan on hiring any employees as part of a new business (or at some point actually hire employees), you need to obtain an EIN no matter what business structure you choose.
Rule 2: If you chose to operate your business without any employees (e.g. sole proprietorship or partnership), you may still need to obtain a new EIN if certain situations occur.
Depending on the business structure that you choose, different rules will apply when you may need a new EIN. Here, we’ll go over situations that deal with Rule 2.
Sole Proprietorships:
If you operate as a sole proprietor without an EIN, you will need an EIN if any of the following are true:
- You file bankruptcy under Chapter 7 (liquidation) or Chapter 11 (reorganization) of the Bankruptcy Code
- You incorporate your business
- You are a sole proprietor and take in partners and operate as a partnership
- You establish a pension, profit sharing, or retirement plan
You will not need a new EIN as a sole proprietor, if any of the following are true:
- You simply change the name of your business
- You only change your location or add locations (e.g. stores, plants, enterprises or branches of the business)
- You operate multiple stores, plants or branches of the same business
NOTE: If you are a sole proprietor who conducts business as a limited liability company (LLC), you do not need a separate EIN for the LLC, unless you are required to file employment or excise tax returns. An LLC owned by one individual is automatically treated as a sole proprietorship for federal income tax purposes. Report the business activities of the LLC on Form 1040 using a Schedule C, Schedule C-EZ or Schedule F. You can find this information at
www.irs.gov.
Partnerships:
If you operate as a partnership without an EIN, you will need an EIN if any of the following are true:
- You incorporate your business
- One partner takes over and operates as a sole proprietorship
- The partnership is "terminated" and a new partnership is begun.
- What is considered "termination" can vary depending on the facts, but if you close the partnership for good and cease all operations you will have likely "terminated" the partnership.
You will not need an EIN if:
- The partnership declares bankruptcy. (However, if a liquidating trust is established for a partnership that is in bankruptcy, an EIN for that trust is required. You can review Treasury Reg. § 301.7701-4(d) for more details.)
- The partnership name changes
- The location of the partnership changes or new locations are added
- The partnership "terminates"
- The IRS generally considers a partnership as terminated if within a 12-month period there is a sale or exchange of at least 50% of the total interest in partnership capital and profits to another partner. However, if the purchaser and remaining partners immediately contribute the properties to a new partnership, they can retain the old partnership EIN.
Corporations:
You will need a new EIN if any of the following are true:
- You are a subsidiary of a corporation and currently use the parent’s corporate EIN
- You become a subsidiary of a corporation
- The corporation becomes a partnership or a sole proprietorship
- You create a new corporation after a statutory merger
- You receive a new corporate charter
You will not need a new EIN as a corporation, if any of the following are true:
- You are simply a division of a corporation
- After a corporate merger, the surviving corporation uses its existing EIN
- The corporation declares bankruptcy. (However, if a liquidating trust is established for a corporation that is in bankruptcy, an EIN for that trust is required. See Treasury Reg. § 301.7701-4(d)).
- Your business name changes
- You change your location or add locations (e.g. stores, plants, enterprises or branches)
- You elect to be taxed as an S Corporation by filing Form 2553, instead of a C Corporation
- After a corporate reorganization, you only change your identity, form, or place of organization
- The corporation is sold and the assets, liabilities and charters are obtained by a buyer
Limited Liability Companies (LLCs):
If you operate as an LLC, you can elect to have the member(s) taxed as individuals (like in sole proprietorships or partnerships) or as a corporation. Depending on how you set up your LLC, and whether your LLC is just you, i.e. one member, or you have multiple members, will vary how and when an EIN may be required.
With that said, it is generally best to obtain an EIN when setting up an LLC (as mentioned throughout this article).
Estates, Trusts, Employee Plans and Exempt Organizations
Estates, trusts, employee plans, and exempt organizations may require an EIN under certain situations. An estate is a legal entity that holds the real and/or personal property of a person after his or her death. A trust is a legal entity created for a trustee to take legal title to property in order to protect and/or distribute the property to beneficiaries named in the trust. An employee plan is generally an arrangement where an employer provides retirement and/or health benefits for its employees. An exempt organization is a non-profit organization that is granted federal tax exempt status by the IRS.
We’re not going to go into the details of estates, trusts, employee plans, and exempt organizations in this article, but be aware that EIN issues may arise with them as well.
Next, we’ll discuss how to apply for your business’s EIN.