Thinking about changing your business entity?
Because you had bootstrapped your brilliant idea, you may have chosen the least expensive business structure to house your business. Often, startup founders and entrepreneurs must commit limited resources to executing their business idea so forming an LLC or incorporating takes a backseat to paying a developer or buying inputs needed to build the “widget”. You learned from friends, family, or internet searches that you may need an Employer ID Number (“EIN”) from the Internal Revenue Service (“IRS”) to open a bank account for the business (because your brilliant idea will attract money) so you get an EIN.
As a business grows and attracts more customers, the business owner may decide that it’s time to choose a new structure for the business. Typically, reducing liability exposure is a major motivating factor for changing the business’s structure as a sole proprietorship or partnership company.
Many business owners are aware of the various business entity choices used to reduce personal liability, such as a corporation (C-Corp or S-Corp) or a limited liability company (LLC)
Can you use the same EIN number for the new structure of the existing business?
According to the IRS website, the following changes to a business entity’s structure would require a new EIN number:
- By Incorporating. When you incorporate a business, the act of incorporation creates a legal “person” separate from its owners (shareholders) and as a new “person” under the law, the corporation needs a distinct EIN.
- By forming and operating as a Partnership.
- By becoming the subsidiary of another corporation. A subsidiary is a distinct entity from its parent corporation, who is the owner (shareholder) of the subsidiary; therefore, becoming a subsidary will necessitate obtaining an EIN distinct from the parent corporation.
- By becoming a Partnership or Sole Proprietorship because the business loses its legal status as a distinct person.
- By becoming a new LLC. Since LLCs are formed under state law, the IRS permits the LLC’s organizer(s) to choose the LLC’s tax entity classification (corporation, sole proprietor, partnership). According to the IRS website:
“You will be required to obtain a new EIN if any of the following statements are true.
A new LLC with more than one owner (Multi-member LLC) is formed under state law.
A new LLC with one owner (Single Member LLC) is formed under state law and chooses to be taxed as a corporation or an S corporation.
A new LLC with one owner (Single Member LLC) is formed under state law, and has an excise tax filing requirement for tax periods beginning on or after January 1, 2008 or an employment tax filing requirement for wages paid on or after January 1, 2009.
You will not be required to obtain a new EIN if any of the following statements are true.
You report income tax as a branch or division of a corporation or other entity, and the LLC has no employees or excise tax liability.
An existing partnership converts to an LLC classified as a partnership.
The LLC name or location changes.
An LLC that already has an EIN chooses to be taxed as a corporation or as an S corporation.
A new LLC with one owner (single member LLC) is formed under state law, does not choose to be taxed as a corporation or S corporation, and has no employees or excise tax liability. NOTE: You may request an EIN for banking or state tax purposes, but an EIN is not required for federal tax purposes.” – quoted from http://irs.gov/businesses/small-businesses-self-employed