Federal Tax ID Numbers for businesses are known as Employer Identification Numbers (EIN), and are issued by the Internal Revenue Service to identify particular business entities for tax purposes.
Before 2001, the first two digits of the EIN identified the business as belonging to a specific geographical area. After 2001, the first two digits were used to identify the particular IRS office that issued the number. There are three operating divisions of the IRS that issue EINs, and the first two numbers identify which one issued the number and has the corresponding business entity’s information on file.
Businesses need an EIN if they have employees, operate as a corporation or a partnership, have a Keogh, are involved with trusts, estates or other esoteric investments, file tax returns involving the sale of alcohol, tobacco or firearms or if the company withholds taxes on income, other than wages, paid to a non-resident alien. While some of the latter requirements apply to very specific businesses, simply having employees means a business must apply for and use an EIN.
If the ownership or basic structure of the business has changed, the IRS requires that the business file for a new EIN. In this way the files at the IRS that contain information on the entity are kept current. Simply changing the name of a business, on the other hand, does not activate the requirement for a new EIN.
Sole proprietors are required to obtain a new EIN if they have entered into a bankruptcy, changed their legal organization to a corporation or partnership, or acquired an existing business.
Corporations are required to obtain a new EIN if they receive a new charter from the state they are incorporated in, become a subsidiary of another corporation, merge with another business or change into another type of business entity.
Partnerships are required to obtain new EINs if they change to corporations, are bought out by other businesses or one partner buys out the others and changes the business to a sole proprietorship.
Limited Liability Companies (LLCs) have become very popular in the last decade as new businesses sought ways to decrease their liability from frivolous lawsuits without increasing already expensive insurance premiums. LLCs were created by state law and had nothing to do with a new class of business created by the IRS. As a result, the IRS does not have a separate category for LLCs and treats them as either corporations, partnerships or sole proprietors depending on the way they are set up. An LLC must have an EIN no matter which business category it is in.
Estates must also have EINs if a trust was created with funds from the estate or if the estate operates a business after the owner’s death. And trusts, which are similar to estates, must obtain EINs if one person is the guarantor or maker of many trusts, if the trust changes to an estate, if a living trust changes to a testamentary trust or if a living trust terminates.
While the rules concerning EINs can seem confusing and arcane, they are really quite similar to the Social Security Numbers (SSNS) that identify individuals. EINs simply identify businesses so that the IRS can retain and exercise control over the processing of taxes and returns.