The topics included in “Understanding Your EIN” are:
- What is an EIN
- Information by type of business entity
- When you need a new EIN
- How to apply for an EIN
- How to complete Form SS-4
- Where to apply for an EIN
- How to avoid common problems
Information by Type of Business Entity
- Definitions of various entity types
- Which forms each entity type may file
- When you need a new EIN
- When you don’t need a new EIN
Scott Allen over at About.com wrote a great article on DBA’s and FBN’s – I highly encourage any small business owner or Entrepreneur read it!
FBA or FBN – Why do you want one and how do you get one?
A fictitious business name, assumed name, or DBA (short for “doing business as”), referred to as “trading as” in the UK, allows you to legally do business as a particular name at minimal cost, and without having to create an entirely new business entity. You can accept payments, advertise, and otherwise present yourself under that name. In fact, if you present your business under a name other than your proper legal name without proper notification, it may be considered fraud. Fortunately, filing for an assumed name is so easy and inexpensive, there’s really not much excuse for not filing one.
Why would you want to file an assumed name? What does it let you do?
It allows you as a sole proprietor to use a business name rather than your personal name. In some places you can use either your full name or part of your name plus a description of your product or service without filing an assumed name, e.g., Elena Garza Interior Design or J. Washington Investigataions. The exact rules vary from country to country and from state to state within the U.S., so check with your local business regulatory authority regarding your area. But if there’s any implication that there are more people involved (Shawad & Sons, The Anderson Group, etc.), or if you just use the first name (Joe’s Garage, Sam’s Boat, etc.), you have to file an assumed name….
- Personal liability protection
- Taxed at corporate and individual level
- Formal meetings and record-keeping required
- Same liability protection as a corporation
- No corporate tax, profits passed directly to owners
- Fewer corporate formalities required
- Not a formal business structure
- Required to legally conduct business under a trade name
- Minimal maintenance required
A DBA permits a business owner to conduct business under a specific name. This is the standard type of filing for a sole proprietorship or a general partnership. A Corporation or LLC file a DBA when the company wants to conduct business under a different name than the Corporation or LLC.
Forming a Corporation or LLC
To form a corporation articles of incorporation must be filed with the state. To file an LLC articles of organization are registered with the state. There are advantages to forming a Corporation or LLC. The owner has some protection for their personal assets. There are some tax advantages to forming one of these business entities. There is a higher likelihood of recognition and trust from customers and employees. Finally it is much easier to raise capital from investors as a Corporation or LLC.
Comparing the DBA, Corporation and LLC there are some similarities and differences.
A DBA or sole proprietor has unlimited liability and takes sole responsibility for all aspects of the business. For Corporations shareholders are not required to pay off company debts. In the LLC members assume no liability for any debts incurred by the LLC.
The sole prop/DBA does not have to form any management hierarchy per law. Corporations must have a board of directors, release an annual report and hold annual meetings. The LLC also has some mandatory requirements but they are not as restrictive as a corporation.
The sole proprietor/DBA has complete control over the whole business and makes all management decisions. Corporations are managed by directors that are chosen by the company’s shareholders. The LLC has an operating agreement that determines who will manage the company.
The taxes for a sole proprietor are paid by the business owner as the business income is filed under the business owner’s personal taxes. A Corporation is taxed at the corporate level, only dividends if distributed to the shareholder are taxed. The shareholders are responsible for paying the dividend taxes. The LLC does not pay taxes. Instead the income or the loss is shared by the members and passes through their individual tax returns.
When a sole proprietor/DBA is trying to raise money for the business it often comes down to loans from friends or possible a small business loan from a bank. A Corporation can sell interest in its company, called stock, to raise funds. An LLC can sell interests in the company if the operating agreement permits the practice.
One of the most important objectives that should be accomplished when a DBA or any business is established is separation of business and personal funds. The new business owner should get a business credit card as well as a separate business bank account. To open a business bank account for a DBA there are a few steps that need to be followed.
First the DBA should be registered with the county the business address is located in. This can either be done on-line or through the local newspaper. Many local newspapers will publish the DBA and announce the new business as well as file the appropriate papers with the county. Once the DBA is registered with the county the business owner will receive a copy of the registration form from the county. This form must be brought to the bank to open a business DBA account.
Finding a Bank
The next step to getting a DBA account is to find the appropriate bank. Be sure to shop around, as different banks will have different fees for their accounts. Keep in mind some business accounts charge per transaction or only allow a certain number of transactions a year. Remember if you deposit the days earning and the deposit consists of cash and 5 checks the total number of transactions is 6 not 1. Some business checking accounts will offer low or no fees if a certain balance is maintained and others might provide free checks. Also be sure the bank you choose will accept a DBA account.
Opening the Deposit Account
Before heading down to the bank be sure to have the following forms of identification:
– Driver’s license-if for some reason a driver’s license is not available, a passport will work just as well.
– Social Security Card
*The DBA will be opened under the personal social security number as revenues are reported through Schedule C on the personal tax returns.
In some instances a business owner will apply to the IRS for a separate business taxpayer identification number. If this is the case bring the letter from the IRS showing this taxpayer or employer identification number (called TIN or EIN for short).
*Business license, be sure to bring your business license and proof the business has been registered with the county.
Running the Business Account
Once the business account is established be sure to keep it separate from any personal accounts. When depositing customer’s payment checks always be sure to endorse them with the business name as well as the personal name. If there is any confusion as to where the check belongs, the personal or business account, the endorsement will provide sufficient identification. In addition this will also help at tax time should any confusion arise.
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