Starting a business involves more than choosing a name and registering an LLC. One of the important steps in establishing your business is obtaining an Employer Identification Number (EIN) from the Internal Revenue Service (IRS).
An EIN is a federal tax identification number used to identify a business. Think of it as a Social Security number for your business — but it serves a different purpose and should be used for business-related activities.
The IRS provides EINs free of charge, and eligible businesses can apply directly through the IRS. (IRS)
What Is an EIN?
An Employer Identification Number, commonly called an EIN or Federal Employer Identification Number (FEIN), is a nine-digit number assigned by the IRS to identify a business for federal tax purposes.
Despite the word “Employer” in its name, you don’t necessarily need employees to have an EIN.
Businesses such as LLCs, corporations, partnerships and certain other organizations may need an EIN based on their structure and tax responsibilities. The IRS also allows businesses that don’t strictly require an EIN for federal tax purposes to obtain one for purposes such as banking or state requirements. (IRS)
Why Is an EIN Important?
- It Helps Establish Your Business Identity
Your EIN gives your business a federal identification number that can be used when dealing with the IRS, financial institutions, licensing agencies and other organizations.
Instead of using your personal Social Security number for every business-related transaction, an EIN provides a separate identifier for the business.
2. It Can Help You Open a Business Bank Account
Separating your business finances from your personal finances is an important part of managing a business.
An EIN can be used when opening a business bank account. The IRS specifically identifies opening a bank account as one of the uses for an EIN. (IRS)
A separate business bank account can also make it easier to:
- Track business income
- * Track business expenses
- * Maintain financial records
- * Prepare for tax filing
- * Demonstrate that the business is operating separately from the owner
3. It Is Important for Hiring Employees
If your business plans to hire employees, an EIN is generally required.
The IRS states that businesses need an EIN if they have employees or have certain employment-related tax responsibilities. (IRS)
Having your EIN in place early can make the transition from a one-person operation to an employer easier.
4. It Can Be Used for Business Licenses and Permits
An EIN can also be used when applying for certain business licenses and permits.
The IRS specifically identifies business licenses as another situation in which an EIN can be used. (IRS)
Depending on your industry and location, you may need additional federal, state or local registrations beyond simply forming an LLC.
5. It Helps Separate Your Personal and Business Activities
One of the goals of establishing a formal business is creating appropriate separation between the business and the owner.
Using a dedicated EIN, business bank account, business records and other business documentation can help create a more organized business structure.
However, an EIN by itself does not create legal separation or provide liability protection. Your business structure — such as an LLC or corporation — and how you operate the business are also important.
6. It Supports Your Business as It Grows
An EIN becomes increasingly useful as your business moves beyond the startup stage.
You may eventually need it when dealing with:
- Banks and financial institutions
- * Payroll providers
- * Accounting professionals
- * Government agencies
- * Business licensing agencies
- * Vendors
- * Tax filings
- * Government contracting opportunities
For businesses interested in government contracting, maintaining accurate business information and documentation is particularly important.
Does Every Business Need an EIN?
Not necessarily.
The requirement depends on the business structure and activities.
For example, a sole proprietor without employees and without certain tax filing obligations may not be required to obtain an EIN. However, the IRS notes that a business that doesn’t need an EIN for federal tax purposes may still obtain one for banking or state tax purposes. (IRS)
If you’re forming an LLC, corporation or partnership, the EIN is generally an important part of the business setup process. The IRS advises that when forming a legal entity, you should form the entity with the state before applying for the EIN. (IRS)
How Much Does an EIN Cost?
An EIN from the IRS costs $0.
That’s right — there is no government fee to obtain an EIN directly from the IRS.
The IRS states that businesses can apply for an EIN for free and, for eligible applicants, receive it online in minutes. (IRS)
Be cautious of websites that charge a fee simply to submit an EIN application on your behalf.
An EIN Is Not the Same as Business Credit
This is an important distinction for new business owners.
Obtaining an EIN does not automatically establish business credit.
Your EIN identifies your business for tax and other business purposes. Building business credit is a separate process that may involve establishing accounts with businesses that report payment history, maintaining appropriate business records and using business credit responsibly.
Think of the process this way:
Business Registration → EIN → Business Bank Account → Business Operations → Business Credit Building
Each step supports the development of a properly established business.
Don’t Just Get an EIN — Build the Business Around It
Obtaining an EIN should be viewed as one part of a larger business startup process.
A properly established business may need to address:
- Business name
- 2. Business structure
- 3. State registration
- 4. EIN
- 5. Business bank account
- 6. Licenses and permits
- 7. Accounting and bookkeeping
- 8. Business insurance
- 9. Business credit strategy
- 10. Marketing and sales
- 11. Contracts and agreements
- 12. Government contracting registrations, when applicable
The EIN is an important piece of the foundation, but it is not the entire foundation.
Final Thought
Your EIN may only be nine digits, but it can become an important identifier throughout the life of your business.
If you’re serious about turning an idea into a properly established business, don’t treat the EIN as just another number on a form. Treat it as one of the building blocks of your business infrastructure.
Start the business correctly. Build the foundation intentionally. Then focus on growing it.
Ready to Start Your Business?
Encore Enterprise helps entrepreneurs move from business idea to business launch by providing practical guidance on business registration, setup and early-stage business development.
PLAN. START. MANAGE. GROW.
This article is for educational purposes and is not tax or legal advice. Business owners should consult qualified tax and legal professionals regarding their specific circumstances.
