Should I Get an EIN or LLC First for My Business?
- Hosted August 21, 2020
- By Admin
This article provides information about securing and sourcing the necessary licenses and documentation for opening an LLC. However, we always recommend contacting a professional to evaluate your unique situation, as the advice provided below is generalized.
Launching a business is an exciting time, but registering your venture with the government is an often intimidating, yet critical, first step. Some entrepreneurs understand the need to obtain an Employer Identification Number (EIN) and form a Limited Liability Company (LLC), but many find themselves asking, “Should I get an EIN or create an LLC first?”
Should I Get an EIN?
The first step is to understand whether you need an EIN. An EIN is a number assigned to your company that functions similarly to a social security number. It is a way for the government to identify your company and is mostly used by the Internal Revenue Service (IRS) for tax purposes. The type of company you intend to establish will dictate which documents of registration you need.
In short, if you intend to operate as a sole proprietor—i.e., be in business for yourself —you probably don’t need an EIN. You can simply use your social security number in association with your company.
However, in more complex business models, especially those with multiple owners, obtaining both an EIN and articles of incorporation is mandatory.
What Is an LLC?
If you’ve determined that your company’s business should be incorporated, then it’s time to map the necessary steps to properly register your company with the government.
An LLC is a corporate structure wherein owners are generally not personally liable for the company’s debts and liabilities as with a sole proprietorship. If your sole proprietorship were to go bankrupt, for example, it could bankrupt your personal finances as well. The benefit of an LLC is that it allows you to keep your business and personal wealth separate. This is why an LLC requires an EIN—it is how the government will identify your company without using your personal social security number to track your company’s taxable revenue.
Should I Get an EIN or an LLC First?
Based on the definitions above, it may seem logical that getting an EIN would be the first step to incorporating your business; however, that is not usually the case.
Because getting an EIN involves both state and federal government agencies, it is generally a best practice to get your EIN after your LLC has been approved by the state. Here is a scenario that demonstrates why:
Let’s say you wanted to start a custom bicycle company called Bordeaux Cycles. Based on the state within which you intend to conduct business, you go through the process of submitting the application to the IRS to acquire your EIN. Then, with your EIN in hand, you head over to your state government building to register Bordeaux Cycles as an LLC.
However, once at the state office, your LLC application is rejected, either because the name is already registered, or it is deceptively similar to another registered company.
This would leave you in the unfortunate position of having to cancel your existing EIN, reapply for a new LLC under a name that is not currently in use (or deceptively similar to one that is), and then re-file for a new EIN once that LLC has been approved.
That’s not to say that you can’t get an EIN before an LLC, but you may assume more of a risk by getting an EIN before you’ve squared away your LLC.
Do I Need an EIN for an LLC Bank Account?
Don’t forget that while registering your company with the government is critical, so is getting your bank account squared away.
In order to open a bank account for your LLC, you will need to furnish proof of your EIN and the LLC itself.
Although other forms of documentation may be required by your bank of choice, such as proof of your company’s physical and mailing addresses as well as valid IDs for all company owners, a bank could immediately turn you away if you do not come with proof of an EIN and registered LLC.
It’s important to note that states differ on the steps required for setting up a bank account for an LLC, so make sure to double-check your state laws before visiting the bank.
Opening a Business the Right Way
When you’re opening your business, you’re going to have a lot on your mind as you navigate the various complexities of starting out. Make it easier on yourself with this three-step checklist:
- Step 1: Register your LLC with the state in which you are conducting business.
- Step 2: Apply for your EIN with the IRS.
- Step 3: In addition to any further required documents within your state, bring proof of both your EIN and LLC to your bank to open your business bank account.
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