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sole proprietorship is one of the most straightforward business structures to set up. As a sole proprietor, your name and business are linked, giving you complete control over all decisions and how you choose to operate. Sole proprietors include independent contractors, solopreneurs, and freelancers but can also include startups, retail storefronts, and other business types.
As a sole proprietor, the paperwork and tax filing requirements in order for your business to operate legally tend to be much less complicated than for other business structures. While most business entities are required to obtain an Employer Identification Number (EIN) for tax purposes, sole proprietors generally are not. Circumstances that will require you to obtain an EIN as a sole proprietor include having employees or filing a pension plan or excise tax return. And while an EIN is usually not a requirement for all sole proprietorships, the benefits of having an EIN as a sole proprietor could make obtaining one worthwhile.
What is an EIN?
The IRS created the federal Employer Identification Number (EIN) system to help identify business entities. An EIN is a nine-digit tax identification number available for free to businesses through the IRS. Think of an EIN as a social security number, but for businesses. EINs are often referred to as Federal Tax Identification Numbers. Many business types use EINs, including:
- Government agencies
- Limited liability companies (LLCs)
- Non-profit associations
- Sole proprietors
- Estates of descendants
Most business entities are required to have an EIN, but businesses can still get one, even when it’s not required.
When is an EIN Required for a Sole Proprietor?
If you are self-employed and operate your business as a sole proprietor, you are not required by the IRS to have an EIN unless you:
- Hire employees
- Plan to file a pension plan or excise tax return
If you do not hire employees and you do not plan to file an excise or pension plan tax return, your business does not need an EIN. Instead, you will use your social security number (SSN) for tax identification. If you hire employees, file an excise or pension plan tax return, or become the sole owner of a Limited Liability Company (LLC) with employees, you must obtain an EIN to file employment taxes.
Who needs an EIN?
The IRS website provides additional guidance on what types of businesses need an EIN, but in general, an EIN is required if you answer yes to any of the following questions:
- Do you have employees?
- Do you operate your business as a corporation or a partnership?
- Do you file any of the following tax returns: Employment, Excise, or Alcohol, Tobacco, and Firearms?
- Do you withhold taxes on income, other than wages, paid to a non-resident alien?
- Do you have a Keogh plan?
- Are you involved with any of the following types of organizations?
- Trusts, except certain grantor-owned revocable trusts, IRAs, Exempt Organization Business Income Tax Returns
- Real estate mortgage investment conduits
- Non-profit organizations
- Farmers' cooperatives
- Plan administrators
The Benefits of Having an EIN
Many sole proprietors keep doing business and filing taxes using their social security numbers. You need to take no action to use your social security number, making it a simple option for small business owners.
You can continue doing business as a sole proprietor using your social security number for taxes, or you can switch to using an EIN. While not required, an EIN benefits both businesses and business owners. Here are some benefits of obtaining an EIN as a sole proprietor.
Open a business checking account
You are often required to have an EIN to open a business checking account. Some business banking platforms (including Novo) allow sole proprietors to qualify with a social security number, but many others make it much more difficult, or impossible, to qualify without an EIN.
File business taxes
As mentioned earlier, some sole proprietorships are required to have an EIN. If that's your business and you don't have an EIN when it's time to file taxes, you could be subject to several tax penalties.
Legitimize your business
An EIN presents a more professional front when dealing with clients and vendors. Instead of others seeing your business as a hobby or part-time gig, having an EIN shows you're serious about building your business.
Establish business credit
Anytime you apply for credit using an EIN, that account ends up on your business credit report. Over time, you’ll build up your business credit history, improving your chances of approval for better rates and terms on business financing.
Obtain business loans faster and more easily
You can generally qualify for a business loan more quickly with an EIN. Building your business credit through an EIN improves your odds of being approved for a business loan.
Obtain business licenses
You may be required to obtain local licenses or permits depending on where you operate your business and the products or services you provide. Business types that require licenses and permits will usually also need an EIN.
Prevent identity theft
An EIN allows you to split your business and personal accounts, meaning fewer accounts using your social security number. The chances of your personal information being stolen may decrease by having an EIN.
How to Apply for an EIN
EINs are easy to apply for as a sole proprietor by submitting IRS Form SS-4. In general, submitting your EIN application online is easier and faster, although the IRS also accepts EIN applications by fax or mail.
Apply for an EIN with Novo
While it’s possible to apply for an EIN via the IRS website, Novo also provides an efficient, free, and secure EIN application service. Simply fill out the application, provide a signature, and click Submit. You can sign up for an EIN in minutes.
Business owners must provide specific personal and business information during the EIN application process, including:
- Business entity type
- Full name
- Social Security Number
- Business mailing address
- Business phone number
- The date you started the company (or when it was acquired)
- Reason for applying for an EIN
- EIN/Tax ID Recipient information
No matter what business you operate as a sole proprietor, having an EIN can help establish you as a legitimate business owner and open up tax and other financial benefits. Analyze your needs as a business owner to determine if having an EIN makes sense. Use Novo's EIN application tool, which makes signing up for an employer identification number a breeze.
This page is for informational purposes only and is not intended to be relied upon as legal, financial, or accounting advice. Please consult your own professional if you have any questions.
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