Why Small Business Owners Require Separate Employer Identification Numbers (EINs)

When you own several small businesses, it's a common question to wonder why the Internal Revenue Service (IRS) does not allow a single Employer Identification Number (EIN) for all of them. Understanding the nuances of EINs and how they apply to different business structures can clarify this issue and highlight why it's necessary.

Understanding the Premise

The premise that the IRS does not allow multiple EINs for business owners is inaccurate. In fact, the IRS typically allows a business owner to have multiple EINs if they own and operate separate businesses. This is particularly true when each business operates as its own entity or if there are distinct operating and legal distinctions between the businesses.

The Basics of EINs

Each business entity in the United States is required to have an EIN, which is a unique nine-digit number issued by the IRS. This number is used for tax reporting and business purposes, similar to a social security number for individuals. The requirement for a separate EIN generally applies when there are multiple distinct business entities that are not part of a larger, consolidated group.

Separate Business Entities

Each small business that is incorporated or operates as a separate legal entity will typically require its own EIN. For instance, if you own a franchise that is legally distinct from your other businesses, you may need a separate EIN for that franchise. Similarly, if you have multiple locations of the same business that are separately incorporated or treated as distinct entities, each location may have its own EIN.

The IRS's Perspective

The IRS may require multiple EINs for separate businesses if there are significant differences in ownership, management, or operations. For example, if your primary business and a new business you started have different overarching structures or differing ownership, they should each have a separate EIN.

Multiple EINs for New Companies

When starting a new company, you should answer 'NO' to the question on the SS-4 form asking 'Has the applicant entity ever applied for and received an EIN?' This ensures that you receive a new EIN for the new company. If you have an existing EIN, answering 'YES' would not provide a new EIN for the new business.

Combining Multiple Locations or Departments

It is important to note that you do not need a separate EIN for different departments of the same company. If you operate multiple locations within the same business entity, they would share the same EIN. The decision to use a separate EIN would generally be based on distinct business entities and legal separateness, not departments or locations.

Changes in Business Structure

Even minor changes in the business structure may necessitate a new EIN. For example, if you open a second location or substantially change the products or services offered, the IRS may require a new EIN. This is because the separate business entity is now operating under different conditions than the original business.

In summary, small business owners should understand that each distinct business entity, whether a separate company or a relevant legal entity, generally requires its own EIN. This is a regulatory requirement to ensure accurate tax reporting and compliance with the rules governing business operations. Each business owner should seek professional guidance to determine the appropriate number of EINs needed for their specific business structure.