New Businesses > Getting Started

What You Need to Know

Forms of Business

Numbers You Need to Know (EIN, SSN, Payee's ID)

You've made a life changing decision -- to pursue the entrepreneurial path. Congratulations. Starting a business is likely to be one of the most rewarding and challenging endeavors you will ever undertake.

At this point, you've already put much thought into what type of product or service you will offer and have likely done your homework to determine whether there is sufficient demand to support your new business. You've scoped out the competition and what they lack -- that's the niche you will fill.

In your head and better yet, on paper, you've thought through how you will get your story out -- market your business, and assessed how much money you'll need to get started and beyond, and begun to strategize about how you will raise capital.

Most importantly, you have a business plan, outlining your goals and objectives and how you hope to go about achieving them. A business plan isn't just for you. Any lender, be it a bank or family and friends will want to know what you've got in mind if you expect them to invest in your venture. Don't write a novel. Some of the best business plans are short and to the point. Focus on your executive summary, as most eyes won't read much beyond it.

Now, you're ready to go.

One of your first critical decisions will be determining which form of business you will create. There are advantages and disadvantages to each. Some considerations include, the legal restrictions, liabilities assumed, number of employees and taxes. We strongly recommend you consult a corporate attorney or tax attorney.

Sole Proprietorship. A sole proprietorship is an unincorporated business that is owned by one person. It is the simplest form of business organization to start and maintain. The business has no existence apart from you, the owner. Its liabilities are your personal liabilities. You undertake the risks of the business for all assets owned, whether or not they are used in the business. You include the income and expenses of the business on your personal tax return.

Partnerships. A partnership is the relationship existing between two or more persons who join to carry on a trade or business. Each person contributes money, property, labor, or skill, and expects to share in the profits and losses of the business. A partnership must file an annual information return to report the income, deductions, gains, losses, etc., from its operations, but it does not pay income tax. Instead it "passes through" any profits or losses to its partners. Each partner includes his or her share of the partnership's items on his or her tax return.

Corporations. In forming a corporation, prospective shareholders exchange money, property, or both, for the corporation's capital stock. A corporation generally takes the same deductions as a sole proprietorship to figure its taxable income. A corporation can also take special deductions. The profit of a corporation is taxed to the corporation when earned, and then is taxed to the shareholders when distributed as dividends. However, shareholders cannot deduct any loss of the corporation.

S corporations. An eligible domestic corporation can avoid double taxation (once to the corporation and again to the shareholders) by electing to be treated as an S corporation. Generally, an S corporation is exempt from federal income tax other than tax on certain capital gains and passive income. On their tax returns, the S corporation's shareholders include their share of the corporation's separately stated items of income, deduction, loss, and credit, and their share of non-separately stated income or loss.

Limited liability company. A limited liability company (LLC) is an entity formed under state law by filing articles of organization as an LLC. None of the members of the LLC are personally liable for its debts. An LLC may be classified for federal income tax purposes as either a partnership, a corporation, or an entity disregarded as an entity separate from its owner by applying the rules in regulations section 301.770-3 of the IRS code.

When you're starting a business, numbers are everything. Few are more important than the taxpayer identification numbers which the IRS uses to process your returns. The two most common kinds of taxpayer identification numbers are the social security number (SSN) and the employer identification number (EIN).

A social security number is issued to individuals by the Social Security Administration (SSA) and is in the following format: 000-00-0000. An EIN is issued to individuals (sole proprietors), partnerships, corporations, and other entities by the IRS and is in the following format: 00-0000000.

Here's what you need to know -- You must include your taxpayer identification number (SSN or EIN) on all returns and other documents you send to the IRS. You must also furnish your number to other persons who use your identification number on any returns or documents they send to the IRS. This includes returns or documents filed to report information such as: interest, dividends, royalties, etc., paid to you, any amount paid to you as a dependent care provider, certain other amounts paid to you that total more than $600. If you do not furnish your identification number as required, you may be subject to penalties. For more on EINs, click on the section New Business Checklist.

Payee's Identification Number Another important number is the Payee's Identification Number. During the course of your business you will undoubtedly make certain payments you must report on information returns. The forms used to report these payments must include the payee's identification number.

If you have employees, you must get a SSN from each of them. Record the name and SSN of each employee exactly as they are shown on the employee's social security card. If the employee's name is not correct as shown on the card, the employee should request a new card from the SSA. This may occur, for example, if the employee's name has changed due to marriage or divorce.

Also, if you make payments to someone who is not your employee and you must report the payments on an information return, get that person's SSN. If you make reportable payments to an organization, such as a corporation or partnership, you must get its EIN. To get the payee's SSN or EIN, use Form W-9, Request for Taxpayer Identification Number and Certification.

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The "New Business" section is not intended to replace legal or accounting services. If legal, accounting, or other professional assistance is required, the service of an attorney or certified public accountant should be sought.