When an incorporated business changes its ownership structure – from multiple owners to a sole owner, or visa versa – this can impact how to file federal taxes. The I.R.S. requires that all tax returns, statements, and accompanying documents include the identifying number of the individual or entity to which they apply – a business’ Employment Identification Number (EIN) or an individual’s tax identification number, e.g. Social Security Number (SSN) or “Individual Taxpayer Identification Number (ITIN).
As a business owner, which should you choose? Here’s a quick lesson in Business Consulting and taxation.
The answer depends on the sort of entity and structure you have. A business entity owned by a sole individual but which is not a corporation, such as a single member LLC (SMLLC), is generally considered “disregarded” (e.g., not separate from its owner for tax purposes) and thus must use its owner’s SSN or ITIN.
Nevertheless, such an entity would still need to obtain an EIN for the following purposes or circumstances:
- Has employees
- Becomes incorporated
- Admits additional members
- Pays federal excise taxes
- Opens a ban account
Similarly, a sole proprietorship – which also has no distinction between owner and business – must also obtain an EIN if it has employees, pays federal excise taxes, acquires another business, or when the sole proprietor declares bankruptcy.
If a business entity was initially formed as a partnership (wherein two or more persons share ownership, profits, and liabilities of the business) the partnership must always obtain an EIN for employment taxes as well as federal income tax. However, if the partnership is reduced to one member, it becomes a disregarded entity that must retain the former partnership’s EIN to file employment taxes.
Conversely, a previously disregarded entity, such as an SMLLC, becomes a partnership upon increasing its membership to more than one member. In such an instance, the entity can no longer use the owner’s SSN / ITIN for tax purposes, but must now obtain a partnership EIN.
As with all taxes, the I.R.S. takes proper tax compliance very seriously, so you want to ensure you know what you’re doing when filing. With Quilca CPA Group by your side, you’ll never have to worry about figuring out these fine but crucial details on your own. Our professional and comprehensive Business Consulting services will cover all your bases, including business structure and tax compliance. To learn more, contact [email protected] or (786) 310-5582.
