Tax Choices When Applying for an EIN

Bio photo of Samuel K. Darling, Divorce & Business lawyer at Genesis Law Firm's headquarters in Everett, WA

by Samuel K. Darling, Everett Business Law Attorney

Video describing tax elections available when applying for an EIN, and which choice would be best for your business. See below for an enhanced video transcript.


[Enhanced Video Transcript]

Hello, and welcome to another edition of Genesis Law Firm Teaches. Today’s topic: tax elections when you apply for your EIN. Your EIN is your employer identification number–it’s your business’s federal tax identification number. Usually you get one when forming a business.

When you apply for your EIN, you’ll have a choice between various tax treatments. At least you’ll have a choice if you are a corporation or an LLC. So in today’s video, we’re going to look at which tax election would be best in given scenarios.

Tax Elections for Corporations

Let’s first look at corporations. Corporations are taxed either as C corporations or S corporations. And there’s really only one good choice. You want to be taxed as an S corporation if you can. If you can’t, then you’re forced to be taxed as a C corporation and you’ll be subject to double taxation. Nobody wants to be taxed twice, if they can help it. So you want to be an S corporation.

Here are the requirements for becoming an S corporation:
  1. Less than 100 owners. That means you need to be closely held. You can’t be publicly traded.
  2. Your owners cannot be businesses. They must be individuals, with some rare exceptions.
  3. No owner of your business can be a non-resident alien of the United States.
  4. Your business cannot be a holding company for other businesses, and that’s defined as whether or not your business has a share in another business of greater than 80%. If you do have an 80% or greater share in another business, you won’t qualify as an S corporation.
  5. And lastly, you can’t have multiple classes of stock if you want to be an S corporation.

If you don’t qualify as an S corporation, then you’re a C corporation and subject to double taxation.

Tax Elections for LLCs

Next, let’s look at LLCs. LLCs have more choice in how they’re taxed.

Multiple Owners

If there are multiple owners, they can choose to be taxed as partners, S corporation, or C corporation.

Single Owner

If there is a single owner, he or she can choose to be taxed as a sole proprietor (sometimes referred to as a disregard entity), an S corporation, or a C corporation.

Which Tax Election Should I Choose for my LLC?

Now, let’s look at which tax elections you should make for your LLC in various scenarios.

Choose sole proprietor if:

You should choose to be a sole proprietor if there’s only one owner and you want to keep things simple. So, for example, if you don’t want to run payroll, then there’s really no point in being anything but a sole proprietor. You still get fairly good tax treatment, and it’s much simpler.

Choose Partnership taxation if:

You should choose to be taxed as a partnership if there are multiple owners and you wouldn’t qualify to be taxed as an S corporation. If there are multiple owners and you don’t qualify to be taxed as an S corporation, then you’re really choosing between being taxed as a partnership or a C corporation. And as I mentioned, you don’t want to be a C corporation. That would mean double taxation.

Choose S Corporation if:

You should choose to be an S corporation if you qualify and you’re willing to do payroll. You’ve got to do payroll in order to make it worth your while to be an S corporation. It’s a little bit more complicated to be an S corporation, but you can save yourself some tax if you’re running payroll. So many people will choose to be taxed as either a sole proprietorship or a partnership up until they hire their first employee and are forced to run payroll. At that point, they’ll oftentimes choose to make an S corporation election.

And you’ve heard that, right: You can make one tax election at first and then change it down the road. That is oftentimes how you get the best of all worlds in terms of your tax treatment.

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