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When should a business apply for an EIN?

Every business has a different origin story. Some entrepreneurs enjoy the thrill of building something out of nothing. Sometimes an inventor has the idea of a lifetime. Often, a side project at home blossoms into something bigger.

Whatever the inspiration or goal may be, there is always a cost to doing business. Big or small, every business needs to prepare for legal matters that will inevitably occur through its formation. Personal and financial liability is a common concern, but there are also issues of government and taxation.

These issues will affect any operation. From sole proprietorships to LLCs or corporations, every business should consider establishing an Employer Identification Number (EIN).

It’s not just a formality

Sometimes called a Federal Tax Identification Number, the primary purpose of the EIN is for easy tax reference. The IRS uses these nine-digit numbers to identify every unique business. This is a free government service, but there is still an application process.

Most business scenarios will call for an EIN: for example, any business with employees or any business that pays taxes (such as a corporation or partnership). The IRS has a checklist of considerations, most of which will point an entrepreneur to filing. But before filing, it is also important to take a closer look at your business structure.

Get off to the right start

Fittingly, everything starts with taxes. Upon application, a company must determine its tax or tax-exempt status correctly. Applications are difficult to change after submission.

Additionally, federal recognition of your business may be a double-edged sword. It stands to reason that the government is more likely to examine how your business is set up upon receiving your paperwork. This means that you need a well-oiled machine rather than a still-in-development idea that is still on the drawing board.

The application process must be taken seriously. First, review your structure and any pending paperwork that may be subject to scrutiny. In our personal lives we often have the luxury of learning to crawl before we learn to walk, but the government expects a business to be on solid footing from the start.

Prior to applying for an official EIN, a business should confirm its concept, core financing and any other official filings. Poor organization, unclear paperwork or oversights can be extremely costly and may even cause a business to fail before it truly starts. The legalities of building a business are often overshadowed by the excitement of putting a new idea forward. However, the most important part of sustainable growth is building on a firm foundation.

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