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When Does A Single Member LLC Need a Tax ID Number?

When Does a Single Member LLC Need a Tax ID Number?I continually get folks calling me for advice because they have established a single member (one owner) LLC and want to open a bank account. The bank is insisting that they have an EIN (Employer Identification Number) before the bank will let them open the account.

When you establish an LLC, you get to choose what tax structure you want applied by the IRS to your LLC. There is no such thing as an LLC in the tax code. You choose how the IRS looks at your LLC, and they ignore the fact that it is an LLC. As a single member LLC you can choose to be taxed as a sole proprietor, S corporation, or C corporation.

The IRS doesn’t know or care if you have a corporation or LLC.  All they want to know is whether or not they will be applying the rules of the IRS Code under Subchapter S or Subchapter C to your company. You can be a sole proprietor or an LLC taxed as a sole proprietorship or an LLC taxed as a corporation (S or C). The IRS doesn’t care how you have structured yourself as a business entity. They just want your money, and they want to know which set of rules they will apply to get the money out of you.

Sole proprietorship is the default taxation structure for a single member LLC. If you specifically file for taxation as a S or C corporation, you will need an EIN for taxation. No, you are not a corporation. You are an LLC being taxed under one of those two (S or C) IRS Subcode sections.

But if you choose to have your LLC taxed using the sole proprietorship rules (or don’t choose anything and take the default), your LLC is considered as a “disregarded entity” by the IRS. To them “disregarded” means that you don’t file a separate return.  Sole proprietorships simply enter their business expenses on a Schedule C within the 1040. It totally disregards the fact that you have an LLC legal structure. You usually use your own social security number as the tax ID number for your company. You file a 1040 with a Schedule C.

By the way, your living revocable trust is another example of a disregarded entity.

When Does a Sole Proprietorship Need a Tax ID Number?

There are a few situations where a sole proprietorship would need to have an EIN, though.  According to IRS Publication 1635: Understanding Your EIN, there are basically three exceptions as to when you do need a separate tax ID number for a disregarded LLC:

  1. If you add another member to your LLC, then you can’t be a disregarded entity anymore. You have to pick a new tax structure – Partnership, Subchapter S, or Subchapter C.
  2. You will need to get a tax ID number if you plan on using a qualified retirement plan under ERISA, such as a full 401(k), SEP, etc.
  3. If you are going into bankruptcy with your disregarded entity, the bankruptcy estate will need a new tax ID number.

You’re not going to jail if you do or don’t get an EIN, but you generally shouldn’t have or need one for a single member LLC taxed as a sole proprietorship. Once you file for an EIN, your business is on the radar for needing to file taxes.  If it takes some time to get things up and running, you don’t want to have the extra headache and possible fines of not filing a return for the business if it isn’t really going yet.

If you are taxed as a sole proprietorship, don’t meet any of the exceptions, and have already offered your SSN as the tax ID, the bank has no business continuing to ask for an EIN. The new accounts person may look at you and say, “This is a company. It needs an EIN.” They don’t understand the concept of a disregarded entity.  You have to get to someone in the bank (maybe the legal department) who knows what is going on.  But if they continue to insist on an EIN, it’s time to get a new bank.

Can’t decide which entity would be the best choice to tax your business?  Check out my Advanced Tax Tactics.  It contains a Business Matrix that clearly explains the advantages and disadvantages of each option.

  1. Does a small start up business need a state ein?

    • Patricia,
      States use the federal tax ID number and do not have their own “state EIN”. So you would use whatever tax ID number you use for your federal return.

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