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An employer identification number, or EIN, is a nine-digit number similar to a Social Security number. It is assigned to a business entity by the IRS. Business entities that are required to file various tax returns use their EIN the same way an individual uses his or her Social Security number. The IRS uses the EIN like an account number to keep track of tax returns. If your business is a single-member limited liability company (LLC) and is required to file a separate tax return, then you will need an EIN.
- IRS Entity Classification
- Sole Proprietorship Tax Treatment
- Corporate Tax Treatment
- Other Considerations
IRS Entity Classification
The IRS allows LLCs to choose how they will be classified for tax purposes. LLCs with two or more owners can choose to be treated as a partnership or corporation for tax purposes. Single-member LLCs can choose to be treated either as a corporation or a "disregarded entity." A disregarded entity is treated like a sole proprietorship by the IRS.
Owners of single-member LLCs who wish to be treated as corporations for tax purposes must file either IRS Form 8832 and elect to be treated as a C corporation or IRS Form 2553 to elect classification as an S corporation. If you do not file Form 8832 or 2553 to elect to be treated as a corporation, the IRS will treat your LLC as a disregarded entity and you will be taxed as a sole proprietorship.
Note this discussion applies only to single-member LLCs owned by individuals, not other companies.
Sole Proprietorship Tax Treatment
By default, the IRS treats single-member LLCs as sole proprietorships. (That is, if you don't make an election, your single-member LLC will be treated as a sole proprietorship.)
As a sole proprietorship doing business through an LLC, you do not need a separate EIN number unless you have employees or are required to file excise tax returns. By default, owners of single-member LLCs report the business profits and losses from the LLC on their personal tax returns using their own Social Security number or tax identification number. Owners of single-member LLCs are not required to have separate EINs because they are not considered employees of the LLC by the IRS. However, if your single-member LLC has other employees you are required to obtain an EIN and file employment taxes.
Corporate Tax Treatment
Corporations are treated as separate entities apart from their owners for tax purposes. As separate entities, the IRS needs a way to keep track of corporations and their various tax returns. The EIN is the mechanism by which the IRS tracks the business activities of corporations. Regardless of whether you are an employee of your single-member LLC, if you have elected to be treated as either an S or C corporation, you will need to obtain an EIN.
Other Considerations
Outside of federal tax considerations, there are other reasons why you may need to obtain an EIN. First, most banks will require you to obtain an EIN if you wish to open a business account in the name of the LLC. Second, many companies with which you do business may require you to have an EIN in order to process payments. Finally, some states may require LLCs to report income on state tax returns using an EIN. It is important to consider these factors as well as the IRS requirements when determining whether you need an EIN for your single-member LLC.
Further Reading
