Starting a Business Tax Services

Entity Selection and EINs

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Entity Selection

While it may seem that there are a million different ways to set up a business, there are three basic starting points.

The simplest option is called a sole proprietorship. This might be the best option if you are just testing the waters. It doesn’t require any formal legal set up and the income and expenses are just included on your individual tax return. The biggest disadvantage is that there is no liability protection, so if someone brings a lawsuit against you, they could have access to your personal assets as well.

For most small businesses, a Limited Liability Company (LLC) is likely the best option. It is a separate legal entity, so your personal assets are protected from the business but is still quite simple to operate. If the LLC only has one owner, then it is included on your individual tax return in the same manner as a sole proprietor. If there are two or more owners, then it will default to be taxed as a Partnership. Once the business reaches a certain level of income, it may be beneficial to change the tax structure to an S Corporation. It is important to understand the benefits and requirements of each option as they do vary significantly and can have long lasting effects on your financial future.

The most complicated and demanding option is a C Corporation. While this is not the best option for most, the new flat tax rate of 21% and limitless size can be helpful in the right circumstances.

Be sure to discuss the optimal tax structure with your accountant as the tax savings can be substantial.

Employer Identification Number (EIN)

Once your entity has been formed, your next step will likely be to apply to the IRS for an EIN. If you formed an entity with an attorney, then they may apply for the EIN as part of their formation package. Your accountant can also apply for you. If you are the “do it yourself’ type, then you can apply online here.

You are not required to apply for an EIN if you are a sole proprietor and you do not have employees – then you can just continue to use your Social Security Number.