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
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What is a Federal Tax ID or EIN-TIN (Employer Identification Number)?
A Federal Tax ID, also known as an Employer Identification Number (EIN) or a Taxpayer Identification Number (TIN), is an identification number assigned to your business by the IRS designed to identify your business to federal agencies. Similar to how a SSN is issued to an individual, a Fed Tax ID or EIN is issued to a business.
Do I need a Federal Tax ID or EIN?
All legal businesses need a Federal Tax ID or EIN to operate, the criteria is as follows: employee(s); operates as a corporation or partnership; files an employment, excise or Alcohol, Tobacco and Firearms tax return. So, basically if a business has any employees or pays any taxes, it needs a Federal Tax ID (simple – huh!).
Why you need a Federal Tax ID or EIN?
You will need a Federal Tax ID/EIN in order to open a bank account, apply for credit, fill out W-9 forms for clients, and file your tax return. Even if you don’t need one, most business advisers recommend you get one and use it instead of your SSN.
Most individuals, when starting a business begin as a sole proprietor without formal incorporation of the business. Typically, the business owner will decide on a name for the business. Hence, we have Mr. John Doe doing business as The Widget Company. The business owner will probably file his or her business name under fictitious names with the state so no one else can use the same business name. In this case, The Widget Company is considered a DBA (doing business as). There are distinct advantages to forming a DBA.
Lower Start Up Costs
Corporations and LLCs usually involve the services of a lawyer to set up the business. In addition accountants are required to prepare and submit taxes. Both of these services can be costly. A DBA does not require the use of a lawyer to start the business, nor an accountant to maintain the books and submit the business tax returns.
There is no separate business tax filing. Instead the business owner files business income through the personal tax form 1040 using schedule C. In addition the DBA pays taxes on the business income along with the personal income.
While all business owners need to comply with the paperwork required by their state, there are a lot fewer forms to file than a corporation of LLC.
The business owner, as a DBA, has complete control over the business. There is no board of directors to answer too and no committees to make decisions on behalf of the business. Whether the business fails or succeeds is completely dependent on the individual business owner.
With a DBA, the business owner is the only individual to reap the rewards. If a DBA is successful there are no dividends to pay to stockholders or other corporate officers. The business owner earns 100% of the income.
Keeping the Secrets
The DBA business owner does not have to share trade secrets with anyone. This means there is less likelihood that the business secrets will be stolen to begin a competing business.
The owner of a DBA is typically at the frontline of the business regularly interacting with the customers. As a result the business owner does not have to rely on any other employees to keep up the “good name” of the business.
A DBA allows for easy handling of business funds. The owner can set up a simple DBA bank account, and will a simple accounting software program maintain all the books.
A DBA encourages an individual to go into business for him/herself with little start up effort In addition a successful DBA can lead to a growing business, forcing the business owner to hire employees. Hence a DBA promotes employment opportunities
When a new business is started a business license is required to conduct daily operations. The license may be required at the local level or at the state level. The type of license required depends on the regulations of the local and state government. Regardless, the first order of business is to register the name with the county or state be it a DBA for a sole proprietorship or a corporation. In addition if the business is not a sole proprietorship run under the business owners social security number then a tax identification or employer identification number must be obtained from the IRS. Once the name is legally registered and the TIN/EIN is received, a license can be obtained.
Getting a Local License
To begin, make sure all the necessary paperwork is in order such as a fictitious name filing and the TIN/EIN. Other documents may be required depending on the type of business. For example, for an LLC Articles of Organization or an Operating Agreement might be required. It is best to check with your local government for what is needed before applying for the license.
The next step is to fill out all applicable paperwork. Return the paperwork to city hall with the appropriate fee. If possible, pay the fee with a business check so there is a record of the payment for tax purposes. If the business checking account has not be opened be sure to get a receipt of payment for business records.
Keeping the Local License
Once the license has been received check with the local government regarding business regulations. One of the requirements to obtaining and keeping the business license might be yearly renewal and a renewal fee. If this is not done annually the business license could be revoked.
Getting a State License
If the business is under state regulation a state business license will be required. For example, some businesses needing state licenses include a realtor, hairdresser, doctor, auto mechanic or a lawyer. Usually a required training course is a necessity to get this business license. To get a state license fill out and file the appropriate paperwork and pay the state filing fee with a business check if possible. Make sure the business renews its license annually and completes in additional training courses required by the state.
Sales Tax Business License
While business licenses might be optional in some state, a sales tax license is always required. This license allows the business owner to charge sales tax to its customers. The local State Franchise Board will let the business owner know what is required.
A DBA, “doing business as” is a means by which you let the county know what your business name is and who owns the business. A DBA registration is required when the business name is not the same as the individual owner’s personal name.
Filing a business name as a DBA with the county does let other business owners know the business name is taken in the county the name is registered. It helps prevent confusion in that typically a business owner looking to file a business name will choose a unique name to stand out from its competitors. It makes no sense to have the same name as another business as this can confuse customers. A client may end up contacting a competitor with the same name in error. Keep in mind a DBA will not prevent another business owner from filing the same name as a corporation or LLC. For example, Branches and Bushes Landscaping can be filed as a DBA. However, another business in the same county could register as Branches and Bushes Landscaping Inc. or Branches and Buses Landscaping LLC. A DBA does not protect the business from a registered corporation using the same name. Typically however, this is not done to avoid confusion.
Law Suit Protection
A business owner with a common name such as Bob Smith, would do well to register as a DBA. This will prevent Bob Smith that owns Branches and Bushes Landscaping from being confused with the Bob Smith that runs a plumbing company. However, the reason the county requires registration of a DBA is to aid in identifying the individual that owns a business. Therefore, someone who is trying to determine who owns Branches and Bushes Landscaping can check the name on county filings to see the individual owner’s name.
How to Protect a DBA Name
For those wishing to protect their business name and prevent another business from adopting the name, the best strategy is to trademark the name. A trademark is a legal entity that prevents another business from using that name. And, should another business try to use the trademarked name, the owner of the trademarked business name can sue to prevent the new business from assuming the name. This process is be costly and is best pursued using a lawyer that specializes in the trademark process.
While a DBA does not afford legal protection or legal rights to a particular business name, it does let other business owners know the particular name is already in use. A smart business owner is not going to adopt a name identical to another business. A poor business reputation belonging to the original business name could carry over to the copycat. Or a lawsuit directed toward a particular name could in error be filed against the duplicate name.
1. It is the law! By law, you have to inform the public that you are Doing Business As any name other than your own personal name. California law states that all Fictitious Business Name Statements (aka FBN/DBAs) must be published for four (4) consecutive weeks in an adjudicated newspaper after filing with the County Clerk/Recorder’s office.
2. Banks will not open a business account for you without proof of your DBA filing.
3. By filing a DBA, you are beginning the process of protecting your business name in the county in which you do business. There are many ways and levels at which you can protect your business name. Filing a Fictitious Business Name Statement is by no means the most powerful protection of your chosen name. You should check with an attorney for details and further protections.
Protect your companies name and reputation by Filing a Legal DBA or FBN (depending on State/County).
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.
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When starting any new business, the owner needs to go to the county offices and file for a fictitious business name – or you can go to LegalZoom and file a DBA in less than 10 minutes! Get tips for choosing a business name with advice from a college business instructor in this free video on business planning.
We created a short 3 min Video showing people how to use DBAFilingOnline.com to file a DBA in 3 easy steps. Check out the video, and file your DBA or FBN online today!
If you are doing business under any name other than your given name, or your actual corporate name, you will need to file a Doing Business As (DBA) or Fictitious Business Name (FBN) Statement.
DBAs are also called: Fictitious Name Statements, Business Name Statements, Trade Names, Assumed Names and Assumed Business Certificates.