When you start a new business, you’ll need to obtain a new Federal Tax Identification Number. However, many entrepreneurs become confused when trying to understand the difference between a Federal Tax ID and an Employer Identification Number (EIN). In short, there is no difference: Both of these terms refer to the same IRS-assigned code for a business entity.
In the past, a business owner had to fill out an extensive form to request a Federal Tax ID number, but today’s business owners can obtain an EIN online. Depending on the type of new business being formed — such as an LLC, Sole Proprietorship, Partnership, Corporation, or Tax-Exempt Organization — a business owner may need to file additional paperwork when applying.
What If You’re Taking Over an Existing Business?
If you’re purchasing an existing business, the IRS generally assigns a new Tax ID to reflect the new ownership. However, each business structure carries some rules and considerations for the transfer of an organization to a new owner.
If a business owner inherits or purchases an existing business that will stay listed as a sole proprietorship, a new Tax ID must be obtained. If the structure of the business changes — a sole proprietorship becoming a partnership, for example — the owner must request a new Tax ID as well. The only cases in which a new Tax ID is not required are as follows:
- The business name changes, without changing ownership.
- The business location changes.
- The sole proprietorship expands to operate several businesses.
If a corporation changes structure, becomes a subsidiary of a corporation, or merges with another entity to form a new corporation, a new Tax ID Number is required. A corporation isn’t required to obtain a new Tax ID in the following situations:
- Part of the entity moves to a division.
- The non-affected corporation in a merger continues to exist as it did prior to the merger.
- The corporation files bankruptcy.
- The corporation changes names or locations.
- The corporation becomes a tax-exempt corporation.
- The corporation reorganizes without changing basic structure.
Partnerships are only required to obtain a new Tax ID if the partnership incorporates, changes to a sole proprietorship, or a new partnership is formed.
Limited Liability Companies (LLCs)
Since LLCs are formed under state statutes, the IRS doesn’t classify an LLC as a specific type of business. Instead, the IRS considers LLCs to be sole proprietorships, partnerships, or a taxable disregarded entity. If an LLC is owned by one person, the IRS will treat the LLC with the same expectations and standards as a sole proprietorship. If an LLC has employees, those employees must be paid under the LLC Tax ID, which must have been issued after January 1, 2009. LLCs may be required to obtain a new Tax ID in the following circumstances:
- A new LLC is formed with more than one owner.
- An owner forms a new LLC and opts for corporation taxation.
- A new LLC is formed with one owner and has a previous excise tax debt.
As a business owner, it’s your job to ensure your business adheres to all local, state, and federal tax obligations and laws. If you’re unsure about tax regulations in your specific county, contact your county clerk for more information. Now, you can start thinking about figuring your self-employment tax.