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Do I need a new EIN if I change from Sole Proprietorship to LLC?

Business structures change over a period of time and most often it happens because businesses want to take advantage of tax benefits. If you are a sole proprietor who wants to convert his business to an LLC then there will be several changes to the business structure. You may be required to apply for and obtain a new EIN because in sole proprietorship, the business and the individual is the same from a tax perspective but that will not be the case for an LLC.

Introduction to EIN

A business depending on its structure will require a Taxpayer Identification Number (TIN) to file its annual or quarterly returns. There are different types of Taxpayer Identification Numbers (TIN) and one of the most important amongst them is the Employer Identification Number (EIN). This article will provide information and answer queries pertaining to EINs for LLCs, converting from a sole proprietorship business to a Limited Liability Company and process of applying for a new EIN.

New EIN for Sole Proprietors

The Employer Identification Number is one of the most important forms of Taxpayer Identification Numbers (TIN) as it is mandatory for a wide variety of businesses including corporations and LLCs. As a sole proprietor, you can use your Social Security Number (SSN) for filing tax returns or you can obtain a new EIN and use the same.

When will you be required to obtain a new EIN?

If you are a sole proprietor then your business and you will be treated as the same entity when it comes to filing tax returns. Sole proprietorships can actually file their returns using Social Security number (SSN), yet you can obtain a new EIN in special cases and thinking of the future like in the following scenarios:

  • If you started your sole proprietorship business with an SSN and without any employees, but at a later date find yourself wanting to hire employees then you will be required to obtain a new EIN.
  • If you are planning to open a bank account for your business then you will require an Employer Identification Number (EIN) as most banks have made it a precondition for opening a business banking account.
  • Although you don’t need an EIN for all types of business loans there are specific loans the lender would prefer an entity to have.
  • If you plan to change the business structure of the sole proprietorship to another type of business entity like an LLC, you will require an EIN for LLC. This will also be applicable if you change your entity to a partnership or if you incorporate.
  • If your sole proprietorship is subject to bankruptcy proceedings
  • If you inherit or purchase an existing business, which is then operated as a sole proprietorship

When will you not be required to obtain a new EIN?

There are specific conditions in which a sole proprietorship entity will not be required to obtain a new EIN like:

  • If you change the existing name of your sole proprietorship business
  • If you change the current business location or add another location
  • If you operate multiple business entities

Are you ready to apply for a new EIN for your business entity?

Converting Sole Proprietor to LLC

If you have started a sole proprietorship business but now want to expand your business or want liability protection, or need tax incentives, what should you do? One of the best solutions is to convert from sole proprietorship to a Limited Liability Company. Once you convert your existing business, you will be required to apply for and obtain an EIN for LLCs. Let’s look at an example to understand the conversion and getting of a new EIN.

How did John convert his sole proprietorship to LLC and get a new EIN?

John Doe is a freelance graphic designer and he started his business as a sole proprietor. A few months down the line, he started getting multiple designing projects from overseas and the workload became much higher than he anticipated. So, he decided to hire some employees so that the workload could be divided and he would be able to achieve his business goals. In order to hire and keep employees as well as tackle the rising requirements of the business, he requires a better office infrastructure. A bigger office infrastructure meant investment and hence he took a loan to expand his business.

This restructuring brought John to the point of thinking of converting his Sole Proprietorship to an LLC, which would help protect his personal assets as well. Moreover, if he doesn’t convert his Sole Proprietorship he will be responsible for filing taxes and proper administration for these hires.

So, he converted his sole proprietorship to an LLC by following steps on how he could obtain a new EIN for LLC.

He converted his sole proprietorship to an LLC and obtained a new EIN for an LLC through the following steps:

  • Step#1 – Register LLC: The first step was to register a Limited Liability Company according to the State Statutes. John filed the Articles of Organization with the state where he wanted to form his LLC along with registration of LLC name as this will also help him to apply for and obtain an EIN for LLC.
  • Step#2 – Dissolution: John has to dissolve the existing business, which in this case is the DBA or sole proprietorship. It has to be dissolved in the state, city or county where it was originally registered.
  • Step#3 – LLC Operating Agreement: John may be required to create an operating agreement although not every state requires it. An operating agreement is a mandatory requirement in five states, which are Delaware, California, Missouri, Maine and New York
  • Step#4 – Obtain a new EIN: An Employer Identification Number (EIN) is required if you are converting or changing your business structure as outlined by the Internal Revenue Service (IRS). Since John wants to convert existing Sole Proprietorship with or without a DBA into a Limited Liability Company; he will be required to submit the EIN for LLC application with the IRS. John will receive a new Employer Identification Number (EIN) by visiting the IRS’ website.
  • Step#5 – Business License and Permits: The type of business license or permit required varies from one state to another. It is also different from one city or county to another depending on the state. Some businesses may require a single license while others may need multiple licenses or permits.

These five steps are very important towards converting your sole proprietorship to a Limited Liability Company and for obtaining a new EIN for LLC. Apart from this, there will be a lot of paperwork involved right from changing registered LLC names in bank accounts, accounts payable, vendor accounts, mailing addresses, websites, business cards, online listings etc.

IncParadise can help you get a new EIN for your LLC?

If your business is a sole proprietorship then converting to a Limited Liability Company has several benefits such as asset protection, tax advantages (as an LLC can choose how it wants to be taxed including as an S Corporation), management and ownership flexibility, and flexible profit distribution among others. If you want to convert to an LLC and are wondering how to do it then we can guide you through the process.

IncParadise, one of the reputed registered agents in the country has the experience and expertise to help you convert your existing business entity into an LLC. Our team of professionals will provide information pertaining to dissolving existing business entities and formation of Limited Liability Company in any state so that you can register your business in the fastest possible time. You can also directly apply for business licenses, annual reports, and EIN for LLC right here using our entity Management Software.

Are you ready to convert from Sole Proprietorship to LLC?