Legally, you are required to identify your business with one of two numbers: either your Social Security Number or an EIN (Employer Identification Number, a.k.a. Federal Tax ID Number). If you are a sole proprietor, your Social Security Number can be used on all of your government forms and other official documents, but most small business advisors recommend that you apply for an EIN and use that number instead. If you are a corporation, LLC, or other state-level entity, you must obtain an EIN because your business is an entirely separate legal entity
When do I need to obtain a Federal Tax ID Number (EIN)?
Great question, and the generally you should obtain a Federal Tax Id:
- If you have a corporation
- If you have employees
- If you need to open a business bank account
- If you want to build corporate business credit
Sole proprietorship is the simplest form of business entity. It means that you just hang your shingle and go out building your business with little practical effect on what you do. Cash checks, open a bank account, create signage and letterhead etc. Also, as long as you’re the only (“sole” – get it?) owner of the business, you can continue operating as a sole proprietor.
Advantages of Sole Proprietorships:
Quicker Tax Preparation:
As a sole proprietor, filing your taxes is generally easier than a corporation. Simply file an individual income tax return (IRS Form 1040) including your business losses and profits. Your individual and business income are considered the same and self-employed tax implications will apply.
Lower Start-up Costs:
Limited capital is a reality for many startups and small businesses. The costs of setting up and operating a corporation involves higher set-up fees and special forms. It’s also not uncommon for a lawyer to be involved in forming a corporation.
Ease of Money Handling:
Handling money for the business is easier than other legal business structures. No payroll set-up is required to pay yourself. To make it even easier, set up a separate bank account to keep your business funds separate and avoid co-mingling personal and business activities.