A few months ago, I gave you some info on starting your business. In that post, I have you some ways that you can legally start a business. As a recap, there are four basic structures:
- Sole Proprietor – In this manner, you don’t actually set up a legal business structure. You just make the business an extension of yourself. You file your business taxes as part of your regular taxes and you can deposit money and pay bills right from your personal accounts. Of course, this means that it can be difficult to figure out what is business and what isn’t. It also means that your personal assets (e.g. House, savings, etc.) are more exposed if you ever get sued.
- Limited Liability Company – Probably the most common structure. This creates a legally separate business entity that is separate from you personally. You can also have partners as part of this. You get some protections legally, if you do it right. Taxes flow through to your personal taxes but you are expected to keep your business finances separate from your personal finances.
- S- Corporation – In this structure, the business is a corporation and a separate entity from you as a person. Your taxes still flow through. This structure has more strict requirements for governance and reporting but can also be easier to get outside financing and arguably had a bit more protection for you individually. You are a bit more limited in how you can get your money back out.
- C-Corporation – This is the most structured form of company. It’s what we often think of as a company and is a completely separate entity from you. This is rare for small businesses.
For all of these, except for the sole proprietorship, once you have created the company, you will need to get a federal tax ID number. This number will often be required for things like bank accounts, payroll, tax filings and insurance. (Depending on your state, you may also need a state number as well.). In this article, I’m going to give you a quick overview of how to apply for that number. I’m going to focus on getting that number (called an Employer Identification Number or EIN or FEIN) for an LLC. If you are setting up an S or C Corporation, it’s best to have a knowledgeable attorney and accountant to set them up. No matter which structure you go with, you should consult the advice of your accountant and attorney. I am neither, just a small business owner who has done this myself a few times. I do that with these instructions you can have those discussions as a more knowledgeable participant and maybe save an hour or two of billable time by doing some of the work yourself.
How to Apply
First things first, the application itself is pretty easy. During the course of applying, you’ll see various warnings, rules and questions. Read everything carefully. Messing something up here could be a real pain later on.
On the next page, you’ll see a few such warnings mostly just telling you how the site works and how long you have.
Click on Apply Online Now.
On the next page, select the type of business entity that you have. Again, carefully read the options and pick what you are. It will determine what application you need to complete.
Once you do that, it will take you to the correct form which you then need to completely. Overall, it’s pretty easy to complete the form. Each one is slightly different and to avoid potential confusion, I’m not going to turn this into a Choose Your Own Adventure.
What Do I Use It For?
Now that you have your have your EIN you might be wondering what you use it for. It’s a bit like a social security number for your company. The good news is, unlike your social security number you don’t need to keep it a secret. I wouldn’t go screaming it from the rooftops or anything but you’re going to have to give it to a number of your business partners. Basically, every time you do work for someone you’re going to need to give them your EIN. Your bank is going to need your EIN. It’s how you have evidence that your business is a real business and the government knows about it. It is also another mechanism for keeping your personal stuff separate from your business stuff. That’s really important and you’re going to see that keep coming back up every time we talk about forming a business.
Having a business will give you a number of tax breaks and other advantages. Of course, the government doesn’t want you taking advantage of things you’re not due. A lot of these rules are designed to keep your personal finances and personal liabilities away from your business. That’s good, because if anyone ever sues you otherwise comes after you that will help you be able to defend yourself.
Your EIN is one of the first steps in making this happen. Know what this number is and anytime you go to do business with someone have this number handy. In fact, just this morning I had to have my password reset for my online banking for my business. One of the questions that I had to answer was what my EIN was to prove that it was my business. Just like I had to do when I opened the account.
Congratulations, you’re one step closer to being a real business. Course, we want to get to the money making part.