Can I change my EIN from Sole Proprietorship to LLC?Everything You Need to Know
If you have a sole proprietorship business (you’re the only owner) and you have an EIN number, this can lead to a number of different questions as your business grows.
When you’re the only owner of a company, the quickest, easiest, and most affordable way to start doing business is to register as a sole proprietorship.
It’s the easiest method because there are the fewest hoops to jump through, it’s quick to set up, and it’s a great starting point for a business.
But there are many benefits to other more complicated structures, for example an LLC (which isn’t particularly complicated, but it takes a bit more to set it up than a sole proprietorship).
If you’ve determined that it’s time to move from a sole proprietorship to an LLC, and you already have an EIN, here’s what you need to know about changing your EIN from a sole prop to an LLC.
Can I Change My EIN From Sole Proprietorship to LLC in 2022?
No, you can’t change your EIN from sole proprietorship to LLC.
You will need to get a new EIN for your LLC, not make a change to the status of your existing EIN.
You cannot use the same EIN, you’ll need to get a new one even if you’re switching from a sole proprietorship to an LLC.
When you sign up for an EIN for your sole proprietorship, it’s unique to that initial business.
If you decide to create a company by forming an LLC (limited liability company), that is seen as a new business and you’ll need to file with the IRS to get a new EIN.
What is an EIN? The Basics
An EIN is an employer identification number.
It’s a unique number that an employer (a business entity) receives from the IRS.
It has nine digits, and it exists to uniquely identify a business.
The main purpose of an EIN is for tax-filing purposes, but it’s also useful for business credit score companies to track a business’ creditworthiness.
Not every category of business registration necessarily requires an EIN, but the vast majority of businesses need to file with the IRS for an EIN.
Benefits of Having an EIN
If you’re in a situation where it’s optional to get an EIN or not, there are still good reasons to get.
Here are some of the benefits.
- It protects you from identity theft: Identity theft is a serious problem, and if you have to use your personal social security number for business activities as a sole proprietor, there’s a much greater chance of it somehow getting leaked or stolen. With an EIN, there’s an extra layer there.
- If you’re an independent contractor: If you do work as an independent contractor, the same benefit applies as mentioned above: you can keep your SSN private from all of the different companies that you do contract work for.
- It helps build business credit: If you plan on opening a business credit card, or getting a line of credit, or having good financing and payment terms with other companies, then having a good business credit score is a vital thing to focus on and having an EIN opens up that door for you to build credit for your business.
Converting a Sole Proprietorship to an LLC
You can convert your sole proprietorship to an LLC.
An LLC is different from a corporation, even though it can file taxes as an S Corp.
An LLC is more of a hybrid between a sole proprietorship and a corporation, with some of the benefits of each.
It’s easier to establish an LLC than to incorporate a business.
If you start off with a sole proprietorship, it’s possible to convert that sole proprietorship to an LLC by following a specific process.
Some states treat LLC’s differently than other states, and may have their own unique nuances in regards to making this change, so make sure you pay attention to information that’s specific to your state.
Make sure that you update your business name (which could be as simple as adding LLC to the end of it) with all of the necessary entities, including the IRS, your local business registration bureau, your bank accounts, your business insurance provider, utility providers, and so on.
Does a Sole Proprietorship Need an EIN?
There are certain instances where a sole proprietorship doesn’t need to get an EIN.
If a sole proprietor doesn’t have any employees and also doesn’t file any pension plan or excise tax returns, then that sole proprietorship doesn’t need an EIN.
However, if a sole proprietorship has employees, they are considered an employer and they need to get an EIN.
A sole proprietorship may also need an EIN if they’re opening up a business bank account, and having a business bank account to keep personal finances separate from business expenses is really important for businesses of all sizes.
For sole proprietors who need to file their taxes and don’t have an EIN, the IRS allows them to simply use their social security number instead of having an EIN.
Since they’re the only person in the business and it’s not incorporated, they aren’t considered to be an employer in the same sense as other business structures are, especially ones who have additional employees.
Final Thoughts on EIN from Sole Proprietorship to LLC
When a business owner wants to take a step towards further professionalism and distancing themselves a bit more from the business itself, then it’s time to make the switch from a sole proprietor structure to a limited liability company, or LLC.
This process is fairly streamlined and there are services that can help with converting a sole prop to an LLC.
There are numerous advantages to this, but the business will need to get a new EIN rather than switching over the existing one.
If you were simply changing your business name, you could most likely use the same EIN, but this is a more substantial change to the business.
It’s possible that you’re in a situation where you might not need a new EIN, and your best option is to reach out to the IRS and explain your situation to them.
They will be able to quickly tell you what your options are.
If you end up needing a new EIN, they’ll direct you towards the form that you need to file.
Even if you don’t need to get an EIN, or get a new one, it can be a good idea to have an EIN due to the aforementioned benefits of having an employer identification number – even if you’re staying as a sole proprietor and are in a situation where you aren’t required to have one.
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