Understanding EINs and DBAs
Are you thinking of starting your business as a DBA? A DBA is a way of registering your business that varies from other kinds of business entities [1]. Before you get into whether you need an EIN for your DBA, you must have a clear understanding of these two terms.
What is an EIN?
An EIN is an acronym that stands for Employer Identification Number. It’s helpful to think of an EIN like a social security number (SSN). It’s a unique identifier that’s assigned by the government to serve as the business’s tax identification number. In fact, the number of digits in an EIN is the same as a social security number. However, the way an EIN is written out differs from an SSN, partially so that it’s more readily identifiable as an EIN and not an SSN, as you can see here:
EIN: xx-xxxxxxx
SSN: xxx-xx-xxx
What is a DBA?
DBA is another acronym, and it stands for Doing Business As. After the word “as,” the DBA would have its unique name. An example might be DBA Joe’s Mechanic Service. In other words, the business is conducting business under the registered name, Joe’s Mechanic Services. Depending on where you live, your state may refer to a DBA as an assumed name, a fictitious business name, or a trade name. DBAs can be confusing, so it’s helpful to think of them as a nickname for your business. Although it’s officially registered, it enables you to do business under a name that’s different than your legal name.
For example, let’s say your official business name is Alpha, Inc. While that name might have meaning for you, it doesn’t tell a lot about what your company actually does. Maybe your company, Alpha, Inc. does a lot of different things in the product world. You might have a business that imports products and another one that distributes products. In this example, you might want to have a DBA like DBA Irish Imports, and another one, DBA Irish Distributors. Both are subdivisions of Alpha, Inc., but they each have new “nicknames” that better describe the operations of the businesses.
Of course, you could simply form new legal entities, called Irish Imports and Irish Distributors. But that involves separate tax returns, separate EINs, and more complex tax compliance in general. A DBA keeps everything a lot simpler while helping you to improve your business branding.
When Do You Need an EIN For DBA?
A DBA is registered with the state and is official. However, it’s not a way to form a legal entity in its own right. For instance, if you have a sole proprietorship, registering a DBA doesn’t automatically make your sole proprietorship a registered company. Therefore, you don’t need to get an EIN when you register a DBA in all cases. But there are certain cases where you do need to get an EIN:
- If the owner of a sole proprietorship files excise taxes hires employees, or sets up retirement plans, obtaining an EIN is mandatory.
- All partnerships must have an EIN, regardless of whether they have employees.
- LLCs and Corporations must get an EIN if they have multiple members or shareholders, hire employees, or file federal taxes such as excise or employment taxes.
- Finally, any business that hires employees must obtain an EIN, as this number is used to report employment taxes, no matter the business structure.
- Any businesses required to pay federal taxes, such as excise taxes, must obtain an EIN, whether the business is a sole proprietorship, partnership, LLC, or corporation.
Navigating Reasonable Compensation with a DBA
Certain business entities require owners to take reasonable compensation to comply with IRS regulations. In fact, not paying reasonable compensation is one of the five reasons why small businesses are audited. A simple way to ensure compliance is to use RCReports to run an annual reasonable compensation analysis to set your salary. Once this has been determined, you can use your new EIN to pay your business taxes.
Step-by-step Guide to Applying for an EIN
Few government applications are as simple as applying for an EIN. It’s also free to apply.
Applying For an EIN Online
The easiest way is to apply online. Before beginning, you need to gather certain information, because the process must be completed in one session. You can’t save your progress and come back later. The information you’ll need is:
- Legal name of the business
- Trade name or DBA, if applicable
- Business address
- Name and SSN/ITIN of the responsible party (usually the business owner)
- Type of entity (e.g., sole proprietorship, partnership, corporation)
- Reason for applying (e.g., starting a new business, hiring employees)
Once you successfully apply online, you’ll receive your EIN immediately, and you can begin to use it immediately. You’ll also receive confirmation of the new EIN by mail, to the business address you supplied. Keep this letter in a safe place, because you’ll need it as proof when you apply for a business bank account and other purposes.
Applying For an EIN by Mail
If you prefer, you can still apply for an EIN by mail. You’ll be downloading Form SS-4 (Application for Employer Identification Number). Mail the completed form to the appropriate IRS address (or fax it to the number provided on the form.) Processing times vary according to the backlog at the time you apply, but you can reasonably expect to receive your EIN within four weeks for mail applications and four business days for fax applications. You can begin using the EIN immediately upon receipt.
Sources
[1] Definition: business entity from 15 USC § 6764(1) | LII / Legal Information Institute. (n.d.). https://www.law.cornell.edu/definitions/uscode.php?width=840&height=800&iframe=true&def_id=15-USC-593669053-708078198&term_occur=999&term_src=title:15:chapter:93:subchapter:III:section:6753#:~:text=The%20term%20%E2%80%9Cbusiness%20entity%E2%80%9D%20means,partnership%2C%20or%20other%20legal%20entity.
“The term “business entity” means a corporation, association, partnership, limited liability company, limited liability partnership, or other legal entity.”
[2] Exempt Organization Annual Reporting Requirements: Meaning of “Reasonable” Compensation | Internal Revenue Service. (n.d.). https://www.irs.gov/charities-non-profits/exempt-organization-annual-reporting-requirements-meaning-of-reasonable-compensation#:~:text=Reasonable%20compensation%20is%20the%20value,all%20the%20facts%20and%20circumstances.
“Reasonable compensation is the value that would ordinarily be paid for like services by like enterprises under like circumstances. Reasonableness is determined based on all the facts and circumstances.”
