OPENING A BUSINESS IN CALIFORNIA: Part 3 Obtaining a Federal Tax I.D. Number

OPENING A BUSINESS IN CALIFORNIA: Part 3

Obtaining a Federal Tax I.D. Number

This is the third in a series of articles written for the purpose of assisting persons who intend to start a business in California.  It is designed for the small business owner who may not be familiar with California law or procedures.  In the last article, I discussed registering one’s business with the County by filing a fictitious business name statement.  In this article, I will describe the process of getting a federal employer identification number and opening a bank account. 

Third Step: The Federal Employer Identification Number.

The federal employer identification number (EIN) is a 9-digit number assigned to  corporations, partnerships, sole proprietorships estates, trusts and other entities for tax filing and other purposes.  As a business, an EIN is necessary before you can hire employees, pay taxes and even open a bank account.  Moreover, the federal employer identification number is often easier to get than a social security number and some foreign nationals use it instead of a social security number.   Although not approved by the government, it is sometimes used as a way around the difficulty that non-citizens who are self-employed and cannot obtain social security numbers.

The federal employer identification number is your business’ form of identification with the government.  It is the number listed on the federal tax return for your business.  It is also listed on the employee payroll reports the business files with the federal government, if you have employees.  And you may wish to give this number – rather than your social security number – to the bank to associate with your business bank accounts.

A business entity needs only one EIN, no matter how matter different types of business it does or locations it has.  However, if a sole proprietor or partnership incorporates, it needs to obtain a new EIN.

Contrary to many mistaken beliefs about employer identification numbers, they do not result in higher taxes or any special fees for businesses who obtain them.  The process of getting one is free and does not require a lawyer.  Moreover, they are required by law for most businesses.  Partnerships, LLCs, and corporations need employer identification numbers whether they have employees or not.  Only sole proprietors with no employees do not need employer id numbers because they can use their own Social Security number instead.

The federal employer identification number is obtained through the Internal Revenue Service (IRS).  There are three ways to get the EIN: on line, by fax or by mail. 

To get the number on line, simply go to www.irs.gov/businesses.  Click “Employer ID Numbers” under “Topics”.  Follow the easy instructions stated there.  You can obtain a EIN immediately. 

The IRS has also set up an easy system whereby you can get your employer identification number by phone.   You simply call the special IRS telephone number set up for this purpose.  You need to prepare the application form in advance – it is IRS Form SS-4.  The person calling must be authorized to sign the form or be an authorized designee of that person.  When you call the IRS, you simply provide the pertinent information from the IRS form and you will get your federal employer identification number immediately, over the phone.  Then you simply send in the completed SS-4 form or fax it to the IRS Service Center with the employer identification number filled in on the form.

As mentioned above, the federal employer identification number is sometimes used by immigrants in business here who cannot obtain a social security number.  As most foreign nationals know, the U.S. Social Security Administration has greatly limited the ability of non-citizens to get a social security number now.  Permanent residents can get them, as can persons on temporary visas which provide the right to work in the U.S. during the pendency of the visa.  But for persons on temporary visas, the card states: “Valid Only with work authorization”.  Persons here on tourist visas, business visas and most student visas cannot get a social security card, as of course, those persons who are here without status. 

The EIN can be obtained by persons who have a business here in lieu of a social security number.  This is often used by persons without a social security number to open a business, open a bank account and pay taxes.  While the government does not condone this behavior, it is widely done.

 In short, the federal employer identification number is an easy-to-obtain, useful and even necessary tool for any business in California.  It should be one of the first steps you take when starting your business.

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CHRISTOPHER A. KEROSKY of the law firm of KEROSKY PURVES & BOGUE has practiced law for over 25 years and has been recognized as one of the top lawyers in Northern California for 10 years by “Super Lawyers” www.SuperLawyers.com .   He graduated from University of California, Berkeley Law School and was a former counsel for the U.S. Department of Justice in Washington D.C.  His firm has offices in San Francisco, Los Angeles and 7 other locations in California. 

A GUIDE TO OPENING A BUSINESS, Part 1

By Christopher A. Kerosky, Esq.

The following is a series of articles on the process of starting and managing a business in California.  It is designed for the small business owner who may not be familiar with California law or procedures.  I will attempt to provide the reader with a step-by step guide through the primary tasks necessary to legally register your business and start operations in this state.

First Step: Choosing a Proper Business Form and Registering Your Business.

One of the most important and sometimes most difficult decisions is the proper legal form for your business. There are four basic legal forms, each described below: the sole proprietorship, the partnership, the corporation and the limited liability corporation (LLC).

Generally, the decision should be made with reference to several factors: simplicity and cost of organization; control and decision-making; taxes; and responsibility for the debts and other potential liabilities of the business.  In another article, I deal in depth with the differences between each, but I will describe the basic differences here. 

A sole proprietorship has the advantage of simplicity, requiring less registration and paperwork.  Also, the income of the business is treated as income of individual for tax purposes, which makes tax return preparation a bit easier.  However, there is no protection from personal liability for the owner.  The debts of the business are treated as debts of individual, including liability due to accident or injury.  

A partnership also does not require formal registration or continuous meetings and minutes, as with a corporation.  However, a written agreement between partners is strongly advisable.  Like a sole proprietorship, the income of the partnership are not separately taxed.  But, again, the partners are not shielded from liability.  There are now limited liability partnerships (LLPs) which do provide limited protection for liability, although not as complete as with a corporation or LLC.

Corporations and Limited Liability Corporations are very similar.  Both require corporate documents to be drawn up, usually by a lawyer.   Both require registration with the state described below. 

With corporations, certain legal documents must be kept on an ongoing basis, such as shareholders meeting minutes, records of stock transactions. Formation of an S corporation requires an additional filing with the IRS.  With LLCs, the ongoing paperwork is not as demanding. 

With both LLCs and S corporations (used by most small businesses), income is treated as the  income of its shareholders just like a sole proprietorship.  With larger C corporations, income of business is not treated as  income of individual for the tax purposes. Only dividends paid to shareholders [or salary paid to employees] is treated as income. On the case of payment of dividends, this can subject the company to double taxation under certain circumstances.

One of the principal advantages of LLCs and S corporations is that the debts of the business are not treated as the debts of individual partners. A corporation can go bankrupt even while its shareholders remain solvent.  Most importantly, the shareholders are shielded from the liability of the corporation as long as the corporate formalities are followed.

Once you have decided which business form you will use, it may be necessary to register your business with the state of California.  Corporations or LLCs need to file special registration papers with the California Secretary of State.  For corporations, the necessary papers are called Articles of Organization.  Limited liability partnerships file a Limited Liability Partnership Registration form. 

The Secretary of State must approve all names before they can be registered.   The main criteria that the Secretary of State’s office applies is that they ensure that your proposed name is not already taken by another entity of the same type.  A business entity in California may not use a name that is already registered to another existing business entity of the same type.   Before you file your registration documents with the Secretary of State, it is worth it to check your potential names to see if they are available.  If they are, you can immediately reserve one of them.  You can do so through the Secretary of State’s office in person or at the telephone numbers or websites listed below. 

California Secretary of State Offices

Name check phone number is 916-653-6814

Online at www.ss.ca.gov. 

Sacramento Headquarters

1500 11^th Street

Sacramento, CA 95814

(916) 657-5448

Los Angeles Branch

300 S. Spring Street, Room 12513

Los Angeles, CA 90013

(213) 897-3062

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CHRISTOPHER A. KEROSKY of the law firm of KEROSKY PURVES & BOGUE has practiced law for over 25 years and has been recognized as one of the top lawyers in Northern California for 9 years by San Francisco Magazine “Super Lawyers” edition.   He graduated from University of California, Berkeley Law School and was a former counsel for the U.S. Department of Justice in Washington D.C.  His firm has offices in San Francisco, Los Angeles and 7 other locations in California. 

WARNING: The foregoing is an article discussing legal issues. It is not intended to be a substitute for legal advice. We recommend that you get competent legal advice specific to your case.