Opening a Business in California:
The Federal Employer Identification Number (EIN).
The federal employer identification number (EIN) is a 9-digit number assigned to corporations, partnerships, sole proprietorships estates, trusts and other entities for tax filing and other purposes. As a business, an EIN is necessary before you can hire employees, pay taxes and even open a bank account. Moreover, the federal employer identification number is often easier to get than a social security number and some foreign nationals use it instead of a social security number. Although not approved by the government, it is sometimes used as a way around the difficulty that non-citizens who are self-employed and cannot obtain social security numbers.
The federal employer identification number is your business’ form of identification with the government. It is the number listed on the federal tax return for your business. It is also listed on the employee payroll reports the business files with the federal government, if you have employees. And you may wish to give this number – rather than your social security number – to the bank to associate with your business bank accounts.
A business entity needs only one EIN, no matter how matter different types of business it does or locations it has. However, if a sole proprietor or partnership incorporates, it needs to obtain a new EIN.
Contrary to many mistaken beliefs about employer identification numbers, they do not result in higher taxes or any special fees for businesses who obtain them. The process of getting one is free and does not require a lawyer. Moreover, they are required by law for most businesses. Partnerships, LLCs, and corporations need employer identification numbers whether they have employees or not. Only sole proprietors with no employees do not need employer id numbers because they can use their own Social Security number instead.
The federal employer identification number is obtained through the Internal Revenue Service (IRS). There are three ways to get the EIN: on line, by fax or by mail.
To get the number on line, simply go to IRS website. Click “Employer ID Numbers” under “Topics”. Follow the easy instructions stated there. You can obtain a EIN immediately.
The IRS has also set up an easy system whereby you can get your employer identification number the same day by phone. You simply call the special IRS telephone number set up for this purpose. You need to prepare the application form in advance - it is IRS Form SS-4. The person calling must be authorized to sign the form or be an authorized designee of that person. When you call the IRS, you simply provide the pertinent information from the IRS form and you will get your federal employer identification number immediately, over the phone. Then you simply send in the completed SS-4 form or fax it to the IRS Service Center with the employer identification number filled in on the form.
For California residents, the relevant IRS phone number is: 800-829-4933
The hours of operation are 7 am until 10 pm.
The address where you mail in the form is: Attn: EIN Operations, Philadelphia, Pennsylvania 19255.
The fax number you should use is: 215-516-3990.
As mentioned above, the federal employer identification number is sometimes used by immigrants in business here who cannot obtain a social security number. As most foreign nationals know, the U.S. Social Security Administration has greatly limited the ability of non-citizens to get a social security number now. Permanent residents can get them, as can persons on temporary visas which provide the right to work in the U.S. during the pendency of the visa. But for persons on temporary visas, the card states: "Valid Only with work authorization". Persons here on tourist visas, business visas and most student visas cannot get a social security card, as of course, those persons who are here without status.
The EIN can be obtained by persons who have a business here in lieu of a social security number. This is often used by persons without a social security number to open a business, open a bank account and pay taxes. While the government does not condone this behavior, it is widely done.
In short, the federal employer identification number is an easy-to-obtain, useful and even necessary tool for any business in California. It should be one of the first steps you take when starting your business.
Features of Sole Proprietorship.
- Simplicity It requires no formal action to set it up.
- No Registration with State Required However, registration as "dba" is recommended if fictitious name is used. Requires filing of fictitious business statement with the County.
- Business Income is Personal income. Income of business is treated as income of individual for tax purposes
- Business Debts are Personal debts Debts of business are treated as debts of individual.
- Personal liability. Owner is not shielded from liability from lawsuits.
Features of Standard Partnership.
- Written Agreement is Advisable It requires no formal action to set it up as a partnership. However, a written agreement between between partners is strongly advisable.
- No Registration is necessary.
- Business Income is Personal. Income of business is treated as income of the individual for tax purposes.
- Business Debts are Personal debts. Debts of business are treated as debts of partners.
- Personal liability. Partners are not shielded from liability.
Features of Limited Partnership.
- Written Agreement is necessary. A rather long, complicated partnership agreement and offering documents must be drafted, usually by an attorney.
- Registration is necessary. Registration with the Department of Corporations is necessary for most limited partnerships.
- Business Income is Personal. Partnership Income as paid to general and limited partners is income of those partners for tax purposes.
- Business Debts are Personal debts. Limited partners are insulated from the debts of the limited partnership in most cases. Debts of partnerships are treated as debts of general partners.
- Personal Liability General Partners are not shielded from liability. Limited partners are protected.
Features of Corporation and S Corporation.
- Requires Legal Filing. It requires corporate documents to do drawn up, generally by a lawyer. Articles of Incorporation are filed with State Secretary of State. Corporation formalities must be followed. This means that certain legal must be kept on an ongoing basis, such as shareholder meeting minutes, directors' meeting minutes, records of stock transactions.
- Registation is necessary. Registration with the Department of Corporations is necessary. Formation of an S corporation requires an additional declaration to that effect to the IRS.
- Business Income is not treated as Personal. In a normal corporation, income of business is not treated as income of the individual for tax purposes. Only dividends paid to shareholders [or salary paid to employees] is treated as income. In the case of payment of dividends, this can subject the company to double taxation under certain circumstances. Unlike other corporations, an S corporation's income is treated as the income its shareholders just like a sole proprietorship.
- Business Debts are not Personal debts. Debts of business are not treated as debts of individual partners. For example, corporation can go bankrupt even while shareholders are solvent.
- No Personal liability. shareholder(s) shielded from liability as long as the corporate formalities are followed.