Learn why having an FEIN is important for businesses of any size.
A FEIN or Federal Employer Identification Number is a number assigned to a business, no matter how large or small, that identifies the business to the Internal Revenue Service. The IRS assigns this number at no charge, and allows businesses to identify themselves as an organization when filing tax documents.
The FEIN can be an important tool for every sized business, even sole proprietorships. This ID number segregates business expenses and income from personal income — allowing taxpayers to keep their financial gains and losses separate. It’s also helpful for business transactions, like banking, and it can protect an individual’s personal identification from being exposed.
Who needs a FEIN?
In addition to tax advantages, when making purchases the FEIN allows you to keep your personal and business buys separate.
Almost every type of business needs a FEIN, even the self-employed. The tax designation has financial and legal benefits. In addition to tax advantages, when making purchases the FEIN allows you to keep your personal and business buys separate. For some small business owners, the FEIN allows them to receive payments from customers without having to provide their personal social security number to the client.
The IRS defines organizations by the type of business. A visit to their website helps small and medium-sized businesses define what type of organization they’re operating and also apply for the FEIN under the right designation.
Sole proprietors or individuals
A sole proprietor owns a company that isn’t incorporated and has not registered in their state as an LLC (limited liability company). These businesses may or may not have employees apart from the owner. Sole proprietorships essentially do not exist separate from the owner.
These businesses generally consist of 2 or more owners and are also not incorporated or registered as an LLC. These businesses provide a product or services and share profits among the owners.
Limited liability companies
An LLC designation is provided to businesses by state statutes. These businesses are incorporated and are typically treated as a corporation or partnership under federal tax guidelines. In addition to their LLC status, they will need a FEIN to operate.
Corporations are businesses that have created a separate legal entity of the business in accordance with state statutory requirements. This requires filing an Article of Incorporation with the state’s secretary of state, which provides the business entity with certain legal rights and protections. It’s a requirement that corporations have a FEIN designation.
An S corporation is typically a smaller business that has filed its Articles of Incorporation with a state entity. These smaller businesses pass through their earnings through the corporation to avoid double-taxation on personal income.
Personal service corporation
As the name suggests, a personal service corporation provides personal services to individual or group clients. A business owner must perform at least 20% of the personal services to qualify for this tax designation. Personal service corporations have filed their Articles of Incorporation at the state level.
There are several other designations for FEIN status through the IRS, including trusts, estates, nonprofits, and church organizations.
Why apply for a FEIN?
The unique FEIN number defines your business as a separate entity from your personal and financial information. You must have a FEIN if you wish to open business bank accounts or apply for loans for your business. It may also be necessary to obtain licenses in your state or area.
Without a FEIN, it can be more challenging to keep business expenses and profits distinct from personal finances. If your small business adds employees, even only temporarily, the designation will allow you to more easily pay staff members and their accompanying taxes.
If a business files for bankruptcy, it will need a FEIN to do so under IRS guidelines. Another plus: small business owners who have a FEIN can establish a retirement plan in the form of a Keogh or Solo 401(k) plan for federal tax treatment.
You must have a FEIN if you wish to open business bank accounts or apply for loans for your business. It may also be necessary to obtain licenses in your state or area.
What you need to apply
The IRS website takes business owners through the process of obtaining a FEIN quickly and easily. You’ll need to provide:
- The legal name of the business
- Information about the identity of the owner(s)
- Mailing addresses, and
- A “responsible party’s” name and that person’s social security number
The site will ask for some additional basic information, based on the type of business and will then assign a FEIN. A hard copy of the identification number can be printed or mailed to the business.
Keeping your FEIN current
The IRS requires notification when the status of your business changes. Changes in address, name, ownership, or even changes to the structure (from sole proprietorship to corporation, for example) must be provided to the IRS. The IRS site guides business owners through any necessary updates.
If you close your business, the IRS requires you to notify them so they can close the account associated with the FEIN.
Applying for a FEIN is quick and easily done online, by mail, or by fax. Remember a FEIN is provided free by the IRS. Don’t apply on any website that charges a fee for the ID — go directly to the IRS to apply.