Taking the leap to start a business is very exciting. The processes and governmental/administrative tasks necessary to start and run a business in the United States can be less exciting and more confusing. GovDocFiling is here to simplify the startup process. We have guided hundreds of businesses — big and small — through the steps to successfully set up and run their business.
The first official administrative step to starting a business is selecting which entity type is the best fit. There are five main types: Sole Proprietorship, Partnership, Limited Liability Company (LLC), S-Corporation and C-Corporation. Once decided, the next step is to get a Tax Identification Number (TIN), also called an Employer Identification Number (EIN), from the IRS by submitting an application for the entity.
The type of entity you register is important because it determines the following for you and your company:
- How profits are taxed by the IRS
- How you will be treated in a lawsuit
- The type of bank account you can open
- Additional tax forms required
Take our entity type survey to see which entity type best fits your business needs.
Start the Entity Type Survey!
Once you have determined your entity type, you’ll need to obtain an EIN. EIN stands for “Employer Identification Number,” and is also referred to as a TIN, Tax ID number, Federal Tax ID, Federal EIN or FEIN. All of these names refer to the same thing — a nine-digit number assigned to all entities by the Internal Revenue Service (IRS).
Start the Tax ID/EIN Application Here!
What is a Sole Proprietorship?
You can have a business as an individual without going through the process of forming an LLC or Corporation. In this case, you are a Sole Proprietor. The biggest difference between a Sole Proprietor and an LLC or Corporation is liability and taxation protocol. Sole Proprietors are a simple entity where no additional formation is required by the state or IRS, other than an EIN/Tax ID.
IRS’ definition of a Sole Proprietorship: A Sole Proprietor is an individual who owns a company that is not incorporated or registered with its state as an LLC. Properties of a Sole Proprietor:
- The business does not exist separately from the owner of the Sole Proprietor/individual
- The risks of the business apply to the individual person’s assets, including those not used for the business
- The Sole Proprietor reports business income on his or her personal tax return
- A Sole Proprietor may or may not have employees
Taxation and liability of a Sole Proprietor:
The type of taxation required of a Sole Proprietor is called “pass-through taxation,” meaning that all of the profits and losses from the business will pass through to the individual’s personal tax return. The profits and losses from running your business will go on form Schedule C of the owner’s personal tax return to the IRS.
When reporting profit and loss as a Sole Proprietor, you are required to pay a self-employment tax of 15.3 percent to the federal government.
The individual is 100 percent liable for business and personal assets at risk in a lawsuit.
Example of a Sole Proprietor:
You started making jewelry and selling it on Etsy.com. You are making an income from selling the jewelry, and you have costs of making and selling the jewelry. You want to open a bank account for the business that is not your personal bank account. In this case, you will need to file for an EIN/Tax ID for the entity type of Sole Proprietor/Individual.
As another example, if you hire someone to work in your home, such as a nanny or caretaker, and you pay for their services, you are considered a household employer and should also obtain an EIN/Tax ID to account for the payment made to the employee.
Tax ID for Sole Proprietor and DBA
The legal name associated with an EIN/Tax ID of a Sole Proprietor will be the name of the individual. How you enter your name on the application for an EIN will be the legal name of the EIN. You can choose to include your middle name or not.
Individuals are allowed only one Sole Proprietor EIN/Tax ID in their lifetime. If you applied for and received a Tax ID from the IRS at some point, but no longer need that EIN or would like to get a different Sole Proprietor EIN for a different purpose, you will need to cancel the original EIN with the IRS. To do this, you must mail a handwritten letter to the IRS with your existing EIN, Social Security Number (SSN) and signature.
You can still have a Sole Proprietorship entity type even if you choose to name the business something other than your personal name. This is called a “Doing Business As” (DBA) or “Fictitious Business Name.” You will need to file the appropriate forms to form a DBA with the county in which you are running your business.
Quickly obtain an EIN/Tax ID for your Sole Proprietorship.
If a Sole Proprietorship sounds like the right option, you will want to get a Tax ID number so you do not have to use your Social Security Number in business matters.
Start Sole Proprietor/Individual Tax ID Application
With your federal Tax ID number, you will be able to the following things:
- Apply for a bank account in the name of the company
- Acquire credit in the name of the company
- Separate personal identities from most business dealings
- Hire and pay employees
- Engage in business with other types of organizations, including Trusts, IRAs, Estates, Non-profits, farmers’ cooperatives and plan administrators
What is a Partnership?
If you are starting a business with another individual or a group of people so that you are not the only responsible party, you can form a Partnership. The liability and taxation are passed on to the individual members of the partnership, and no additional federal filings or fees are required other than an EIN/Tax ID to identify the business.
IRS’ definition of a Partnership: An unincorporated organization with two or more members is generally classified as a Partnership for federal tax purposes if the members take part in a trade, business, financial operation or venture and divide its profits. Properties of a partnership:
- Partners can be individuals, corporations, trusts, estates or other partnerships
- Each partner contributes money, property, labor or skill and expects to share the profits and losses of the business
- Equity of the Partnership does not need to be divided equally among partners to be a partnership
- While not required, Partnerships should create a Partnership agreement that includes the following:
- How partners will divide expenses
- Where the profits will be allocated
- Frequency and amount of distributions
- The responsibilities of each partner
- Disagreement resolution plan
- How a partner can exit in the future if desired
Taxation and liability of a Partnership:
The type of federal taxation of a Partnership is called “pass-through taxation,” meaning that all of the profits and losses from the business will pass through to the partners’ individual tax returns. The profits and losses from running your business will go on Form 1065 of your personal tax return to the IRS. Income and deductions will go on Form Schedule K of your personal tax return to the IRS.
The percent of ownership decided on between partners will be the same percentage of income that is passed through to each individual’s Form 1040 (individual income tax form).
Partners in a Partnership are required to pay a self-employment tax of 15.3 percent to the federal government. The individuals of a Partnership have unlimited liability, meaning that you are personally responsible for any debts that any of the partners may have taken on in the business. In a lawsuit, your personal assets, as well as the personal assets of all of the partners, could be at risk.
Quickly Obtain your EIN/Tax ID Number for your Partnership
Partnerships are required to have a Tax Identification Number for federal tax purposes. The process of obtaining an EIN can be complicated with the IRS, but with GovDocFiling, it’s very simple!
Start Partnership Tax ID Application