Many sole proprietors (including me) upgrade to an LLC to profit from the many tax and liability benefits. But, when that happens, the following 2 questions arise:
And let’s say you’ve been using your Social Security number (SSN) for your sole proprietorship and want to start a single-member LLC (taxed as a sole proprietor by default). Surely you can use that, right? You’d think so, wouldn’t you? Unfortunately, the answer is yes, no, and maybe.
I’ll tell you why, plus when your sole proprietorship needs an EIN, and 7 significant reasons you should get one even if you don’t need one.
Sole proprietor owners and their businesses are not separate taxable legal entities, so the IRS doesn’t require them to have an EIN.
Instead, you can use your SSN to identify your business come tax time and report your income and expenses using Form 1040 Schedule C.
However, some cases require a sole proprietor to get an EIN, such as:
When none of the above apply to your business, you don’t need a sole proprietorship EIN.
Okay, simple enough, but what about that LLC you want to start? Will you need a new EIN?
I’ll clarify next:
The IRS “Do You Need a New EIN” page says that the sole proprietorship owner needs an EIN if they form a corporation, multi-member LLC or partnership.
However, when we look at the IRS “Single Member Limited Liability Companies” page, it says that you must use either your SSN or EIN when filing tax returns.
So, what’s the answer? It comes in 2 parts:
Stick with me, and I’ll explain.
The IRS doesn’t require single-member LLC owners to get a separate EIN because they’re not employees of the LLC. So, when you move from a sole proprietorship to a single-member LLC, you can use your SSN to report returns and pay taxes using Schedule C (Form 1040).
However, you will need an EIN if you form a multi-member LLC.
Let’s say you start a single-member LLC using your SSN but then need employees to expand. Here, you’d need an EIN.
And even if you don’t hire employees and are a single-member LLC that can use your SSN, most LLCs need an EIN when:
Additionally, an LLC needs an EIN if it:
You apply for an EIN for your LLC by filing Form SS-4, Application for Employer Identification Number.
Even if none of the above apply, many sole proprietors and LLC owners get an EIN because of the many advantages, which we’ll look at below.
That’s a question many sole proprietors ask themselves at some stage. I did and here’s what I learned.
Getting an EIN for my sole proprietorship before I thought I needed one was beneficial. Perhaps not immediately, but definitely as my business grew, especially when I formed my first single-member LLC.
For example:
I didn’t need an EIN for all 7 reasons, but I did for 6! Review the summary below to help you decide:
You need an EIN if you | LLC | Sole-Prop |
Hire employees | Yes | Yes |
File for bankruptcy | Yes | Yes |
Buy or inherit an existing business | Yes | Yes |
Have a Keogh or Solo 401 (k) retirement plan | Yes | Yes |
Form a partnership | N/A | Yes |
Form a multi-member LLC | Yes | N/A |
Choose to be taxed as a corporation | Yes | N/A |
Withhold taxes on payments made to non-residents | Yes | Yes |
Work with nonprofits, farmers’ cooperatives, or plan administrators | Yes | Yes |
Open a business bank account | Likely | Likely |
You now know the answers to 2 of the most common questions:
In case you missed it, the answers are no and yes.
And while you could run your sole proprietorship for years never needing an EIN, the advantages of having one make getting one an easy decision!
That’s another question that needs clarification and provides mixed answers when asking it online or speaking with the IRS.
Even if you mail the IRS requesting to transfer your EIN from your sole proprietorship to your LLC, you’ll most likely receive a rejection letter.
To find a definitive answer, we must look at the IRS’s “Do You Need a New EIN” page on their website. It says that sole proprietors need a new EIN if the following conditions apply:
Here, the IRS clarifies that if you incorporate (i.e., form an LLC), you must apply for a new EIN.
The IRS says, “Generally, businesses need a new EIN when their ownership or structure changes.”
So, even if you already have an EIN for your sole proprietorship, you’ll need a new one when changing your business structure. For example, starting an LLC/partnership or when you purchase or inherit an existing business that you operate as a sole proprietorship.
The same applies to corporations and partnerships, although the reasons and conditions differ from a sole proprietorship.
No, each EIN identifies one specific business entity, and you cannot transfer it.
Yes, you can; however, there are conditions.
You cannot have 2 EINs for one business entity, as the IRS only allows companies to have one tax ID number for filing taxes.
However, if you start multiple entities, you must get EINs for each because, as mentioned above, the IRS requires every business to have an individual tax number.
This portion of our website is for informational purposes only. Tailor Brands is not a law firm, and none of the information on this website constitutes or is intended to convey legal advice. All statements, opinions, recommendations, and conclusions are solely the expression of the author and provided on an as-is basis. Accordingly, Tailor Brands is not responsible for the information and/or its accuracy or completeness.
Terry is a serial entrepreneur with over 25 years of experience building businesses across multiple industries – construction, real estate, e-commerce, hotelier, and now digital media. When not working, Terry likes to kick back and relax with family, explore Taoism’s mysteries, or savor the taste of fine Italian red wine.
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