One of the most important parts of starting your new business is making sure that all of your documentation is filed correctly. Although this documentation can be intimidating, with the right direction, the process will appear to become easy and convenient. As such, the first thing that you should do is obtain a federal Tax ID number so that you can put it on all of your company paperwork. However, what is the Tax ID process? Let’s break it down with a few simple steps.
What is a Federal Tax ID?
Simply put, this is the number that the IRS uses to identify a person or business for tax reasons. As an individual, we all have a federal ID in the form of a social security number. However, to keep things separate for your company, you will need what’s called an Employer ID Number (EIN). You can receive your Tax ID number within an hour of submitting your application.
Importance of Having an EIN
When filing as a sole proprietorship, partnership, or LLC, you could use your social security number instead of obtaining a new Tax ID from the IRS. However, this will usually be a mistake in the long run. Overall, you will need an EIN if you plan on:
- Hiring any employees
- Getting a merchant bank account
- Keeping your personal finances separate
Even if you plan on becoming a sole proprietorship (meaning no staff, ever), it’s still better to get an EIN so that your company is not tied directly to yourself. This separation will be crucial as it can prevent business debt from spilling into your personal finances.
Choosing an Entity: Why is it Important?
When starting a business, choosing what entity best suits your situation is crucial. When thinking of the appropriate entity, think of the future of your business, rather than the current state of existence it is in presently.
Depending on your business structure, there are differing choices available. C Corporations, S corporations, Partnerships, and Sole Partnerships fall under this category. As well, one of the most common entities are known as Limited Liability Companies. This is the most flexible out of the choices while having many perks to it. Starting anLLC is an easy and convenient way to begin applying for your Tax ID number.
Fortunately, the process for getting this number from the IRS is relatively simple. The best way to do it is to go online and fill out the paperwork and pay the fee all at once. In many cases, you can receive your number in a matter of hours, meaning that you can potentially have your new business up and running within a day or two.
In the end, having a federal Tax ID will enable you to do much more with your company than you could by using your social security number. If you want to set yourself up for success, this is the best way to do it.
