What is an Employer Identification Number (EIN)
- Every business with employees, even a sole proprietorship, must obtain an EIN. This unique identifier is mandatory when submitting an employment tax return.
Additionally, there are various situations where a business should secure an EIN, such as:
- Being a corporation or undergoing taxation as one.
- Operating as a multi-member LLC or a partnership.
- In cases where a business is purchased or inherited.
- Establishing a Keogh retirement plan or an individual 401(k).
- When seeking bankruptcy protection.
- Submitting specific excise tax returns.
Aside from assisting tax authorities in recognizing your business, an EIN also aids in positioning your business as a distinct entity from yourself. This differentiation is essential for creating a business credit profile and can offer legal liability protection. Financial institutions might also require an EIN when you’re opening a business bank account or seeking a business loan.
What is an S-Corp
An S corporation, also known as an S subchapter, refers to a type of legal business entity.
S corporations choose to have their corporate income, losses, deductions, and credits flow directly to their shareholders for federal taxation purposes. Consequently, shareholders of S corporations declare this income and loss on their personal tax forms and pay tax based on their personal rates.
This setup helps S corporations bypass double taxation on their corporate earnings. However, they must pay taxes on specific built-in gains and passive incomes at the corporate level.
For a corporation to qualify as an S corporation, it must:
- Be based in the U.S.
- Only have permissible shareholders, which can include individuals, certain trusts, and estates. However, partnerships, other corporations, and non-resident alien shareholders are excluded.
- Limit its shareholders to 100 or fewer.
- Issue just one type of stock.
- Not classify as a disqualified corporation, such as certain banks, insurance providers, and domestic international sales corporations.